Chapter 10

Lessons on Winning and Losing in China

In chapter 2, we argued that to succeed in China a company must satisfy the three necessary conditions and competently make five categories of managerial decisions, from which can emerge agility, also an important factor. We further recognized that luck can help or hurt. Table 10.1 summarizes our assessment of the relative importance of each factor on the outcomes we observed in the eight case studies.

Demand

The key question for a foreign firm entering a new market is whether potential customers need the goods and services the firm has the alpha assets to deliver with a competitive advantage. For Amazon, Norwegian Cruise Line, Hyundai, Intel, and InMobi, demand was evident from the outset. Demand then strengthened with time for Amazon, Hyundai, and Intel. Sequoia bet that demand for venture capital would grow in China. It was right, and booming demand fueled its success. Zegna also bet correctly that demand for its clothing would rise with China’s GDP. For LinkedIn, lack of demand was an impediment. Chinese professionals wanted to advance their careers, but LinkedIn learned they did not want to display their profiles online and construct business-only online networks, as with its offering elsewhere. LinkedIn improvised with Chitu. However, for this pursuit, it lacked alpha assets.

Access to the Market

Our sample is necessarily selected from firms that did manage to enter China, but in our view, government regulation is a make-or-break factor for only a very few industries, such as higher education, telecommunications, military, and media. Intel and Norwegian Cruise Line were encouraged to enter the market by the Chinese government, although the importance of the semiconductor industry required that Intel invest significant managerial attention in building and sustaining strong political relationships. Hyundai had no alternative but to form a joint venture with a Chinese company. Zegna got lucky when partnership requirements were relaxed after it entered. For Sequoia, LinkedIn, Amazon, and InMobi, access to the market required navigating some regulations, but that did not determine their fortunes.

Advantage and Alpha Assets

Just one of the companies we featured, Intel, brought overwhelming alpha assets to China. Its chip technology is the ultimate alpha asset—Intel had a virtual monopoly on the central processing unit that powered the PC revolution. Hyundai probably had the next strongest position, possessing a nearly unique capability to produce automobiles at low cost during a period of growing demand. Sequoia’s brand gave it a head start among Chinese entrepreneurs. Zegna’s alpha assets were brand and culture, helpful but perhaps not decisive. InMobi possessed a good-enough mobile advertising solution when few others were in the market. It knew this source of advantage was fleeting, and so it scrambled like a start-up to build a more sustainable advantage by bringing many users onto its platform. Neither Norwegian Cruise Line nor Amazon brought powerful brands, scale economies, or unique offerings to China, especially in the face of intense competition. In the West, LinkedIn’s alpha asset was its customer network, but that failed to attract Chinese professionals, beyond the relatively small group who worked for foreign multinationals or aimed to.

Commitment

All of our success stories eventually involved large commitments, but the full commitment was rarely required from the outset. Zegna started with a single store and a partner, although it did persist patiently in experimenting with and developing the Chinese market over decades. Sequoia raised a first fund and hired a partner and, after its early successes, increased its commitment. For InMobi, Intel, and LinkedIn, the initial investments did not require betting the company, but the commitments were certainly meaningful expenditures for the parent. InMobi and Intel doubled down as their odds improved. LinkedIn scaled back when its initial strategy faltered. Hyundai, in contrast, had to make a large multiyear bet on an assembly plant and distribution network before it could sell its first car.

For Norwegian Cruise Line, the commitment to build a new ship for the Chinese market was huge, but it turned out that the ship was redeployable to Alaska with some refurbishment. NCL quit after its first attempt did not show promising results. Amazon had to invest significantly to establish a presence, but the stakes kept rising as well-funded competitors bet huge sums to acquire a dominant position. At that point, as huge opportunity costs arose, it retreated. Although in the larger context, NCL and Amazon perhaps made the best available use of shareholder capital by quitting, with their retreats clearly ending their prospects in China.

Governance, Leadership, and Agility

Probably the most consistent lesson from our research is that agility arising from autonomy in governance and leadership prefigures success. This is nerve-racking for executives of a parent company—they understandably will not want to relinquish control but must realize that excessive oversight leads to sluggishness in China. For Amazon, its alpha assets were insufficient to overcome its lack of agility. Contrast that with InMobi, which granted nearly full autonomy to its China head, essentially launching a start-up that beat speedy local rivals.

Still, even for governance, one size does not fit all. A fully autonomous Intel China makes no sense, given the resources required to develop and manufacture chips. And, given that Zegna’s key alpha asset was its heritage and culture of customer care, it had to tightly integrate its China team with the rest of the company. Its aim was to translate that culture in China, and it managed to do so.

The successful leaders in our cases come from many backgrounds. Sequoia and InMobi were launched in China by Western-educated mainland Chinese. Zegna and Intel were not. Those companies tapped managers with experience with the parent company. Sequoia and InMobi bet on outsiders. For most companies, an ideal China leader cannot be found, if he or she even exists. Most companies will have to choose a leader with either deep experience in China or strong ties to headquarters and hope that this person can compensate for any deficiencies.

Strategy

Strategy formulation from the outset is good discipline, requiring that the management team consider whether its initial plan calls on the company’s alpha assets and is realistic about committed resources. Most of our cases describe sensible initial strategies. Amazon brought its “one best way” to China, as it had to other global markets. LinkedIn planned to connect Chinese professionals in the way it had their counterparts in the United States and Europe. Hyundai aimed to use its scale and its tightly integrated supplier network to deliver an affordable car to the Chinese middle class. The weakness for these companies was in not modifying their strategies when early results suggested difficulties. Zegna improvised when regulations allowed greater independence. InMobi did so when it realized the Chinese market was too different to allow its global solution to prevail. For Hyundai an initially successful strategy was not followed by a modification of its plans to adapt to a changing market and more intense competition.

Product

All of the companies we studied adapted their products for Chinese customers. The critical decision each company made was in determining its platform boundary—which elements of the global offering were standard and which could be localized. The location of the boundary depends on two drivers. First, how different are the customer needs in China? Second, how much cost and effort will localization require? For Intel, its microprocessors must be standard globally. For Amazon, the Chinese consumer differed enough that more localization was needed. Of course, getting the product just right, even given a willingness to adapt, is tricky. Norwegian Cruise Line showed great willingness to localize, but missed the mark, and retooling a cruise ship is not as easy as modifying the user interface on a mobile app.

Luck

A lot of books about business offer simple formulas. And humans do like simple causal explanations for almost everything from child rearing to happiness. When we started this project, the coronavirus was still confined to bats, and there were a dozen flights per day between San Francisco and China. As we were writing, we coauthors were quarantined on two different continents. Luck, or randomness, if that label makes you feel less helpless, remains a hugely important factor in business as in life—and especially so when a business involves geopolitics, the macroeconomy, technological change, and the dynamics of the natural world. In every one of our cases, luck mattered. Hyundai faced decisively bad luck with geopolitics when the United States deployed its missile defense system in South Korea. Amazon encountered surprisingly fierce competition. All four of our success stories included good fortune. Luck cannot be controlled, but the best managers can at least be ready to confront randomness by imagining scenarios, drafting contingency plans, and being prepared to respond to whatever the future brings.

Revisiting the Default Hypotheses

We opened the book by listing the default hypotheses that even casual observers would cite to explain business success in China, including the role of government, differences in Chinese consumers’ tastes, and cultural challenges. All of these hypotheses are supported to some extent by the experiences of the companies we studied and are reflected in our framework. The role of government falls within our necessary condition of access to the market. Differences in consumer preferences are subsumed by adaptation of the offering to the market. Cultural variation in management styles is addressed within our factors of leadership and governance. However, the initially hypothesized factor of guanxi—or China’s particular reliance on informal influence networks—appears, at least in our cases, to be less important than we had expected. Trust and personal relationships remain critical in doing business in China but not more so than elsewhere. Chinese business today seems to us very much no-nonsense. You may get an introduction to a business contact because of guanxi, but we haven’t learned of many irrational deals done to satisfy the demands of social allegiance. Even the style of business seems to have evolved. In the early 2000s, doing business over long 12-course dinners with a lot of baijiu toasts was common. Not today. In fact, we’ve recently observed managers and entrepreneurs doing two successive one-hour dinners in one evening for two different business matters.