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COMPANY FAILURE ANALYSIS

The following brief analysis illustrates reasons for market failure in China. Therefore, first, risk and success factors are outlined in scholarly publication. Then recent prominent real life cases are shortly introduced. Finally, a conclusion is drawn, and the market selection literature is introduced.

RISK AND SUCCESS FACTORS

Qiu Licheng and Li Na (2003) outlined the importance and increase in foreign direct investment in China.  The researchers note that the accumulated knowledge and experience is a vital factor for increasing market commitment and further investments. In this regards does growing market knowledge and experience rise investor confidence.

Zhang Yi (2011) implies that the Chinese government is influencing investments in industries which they consider of strategic importance such as the internet industry. Hence, government relations do contribute to business performance.  Here, Huang Zhiqing (2016) stresses legal and governmental compliance as a relevant factor. He states that government interaction can help solve issues resulting from copyright questions or unethical behaviour issues as well as prevent unfavorable financial instruments by rules and regulation.  The researcher also highlights in his study risk management as the major success factor for market entry. The researcher is conducting a case study on eBay's market entry and discusses underlying reasons for the market failure. He states that the business risk is often proportional to the return ("high risk, high return").  Nevertheless external risks such as natural disasters, political events or macroeconomic policies are incalculable but must also be addressed.  Furthermore, currency fluctuations and high personal cost of foreign experts hold risks. Also, control over all levels of production is essential for good performance and lost control can result in a negative impact.

Furthermore, over confidence and significant financial capabilities often result in missing localization.  Thereby, a case study highlights the risk of directly transferring an already approved business model to another market without taking into consideration local cultural values and cultural differences.  Furthermore, the researcher also stresses strategic challenges in the host country as potential risks. These justify the investments in product and service diversification as unbalanced regional development in China has a strong impact on infrastructure, local purchasing power and consumption behavior. Moreover, the researcher states that were gradually increasing market commitments are an effective approach to entering the market.

Moreover, Huang argues, that employees with a different cultural background as the local market often do not understand the market adequately. Therefore, local talent acquisition and enhancements and effectiveness of cross-cultural management are essential. The result of this can be unstrategic marginal decisions, such as eBay's price policy.  Also, the use of native talent, rather than experienced international managers, does decrease not only wage costs but also creates a certain entrepreneurial enthusiasm and the common feeling among the employees.  Also, as the supply chain has a major function of business activities, the researcher suggest to utilized the local production system more directly by e.g. approaching the original equipment manufacturer. In this regards, local institutional cooperation and exchange with both the government and other institution such as research institution can improve business activities and performance. Hence, the employment of local talent and regional cooperation at all levels has an impact on business success.  However, a result of foreign influence in a corporation often is the procurement and implantation of high-quality products which lead to, higher operating costs. These lead to decreasing sales volume and, in turn, increase the costs even more by hindering an economy of scale.

Furthermore, foreign corporations are regarded to hold advantages regarding technology, management expertise, brand and resource capabilities. However, research also states, that these benefits are not always utilized in a proper manner to gain a competitive advantage in the areas of infrastructure accessibility and market penetration rate by i.e. locating internet servers overseas instead of locally in China. In contrast, Chinese companies hold a high implantation rate and use aggressive marketing strategies.  Research on the market strategy of multinational corporations show similar results, but also highlighted some other factors. Feng Bo (2005) points out, that though abundant capital is advantageous, increasing competition on the Chinese market as a result of more capital invested, creates counterbalance for this advantage.

Further factors stress in particular the importance and the challenges of a competitive supply chain. Not only production and procurement centers serve the market, but in particular also, development and research facilities which help to meet the local demand. Siemens in Shanghai is mentioned as a good example.  Even though cooperation or joint ventures offer a powerful combination, by utilizing advanced technology, mature management expertise, and broad financial capabilities in conjunction with expertise on Chinese sales channels, market capabilities, and local workforce, do many joint ventures underperform in China. Foreign companies will, if not suited to China's market environment, cultural environment, technical characteristics, even with advanced technology and sophisticated management capabilities, fail eventually.  However, many joint ventures decrease political risks and show a better-operating performance and return on investment.  

A study by Zhu Jinwei and Li Lixia (2005) suggest that many companies fail regarding operating losses of their business subsidiaries.  The researchers addressed in particular joint ventures and examined one in more detail. A possible reason for underperformance is the conformity dilemma, to serve customer specific solutions or to apply international conformity standards to all product.  The study showed that the foreign entity withdrew capital after operating losses. Subsequently Chinese shareholders took over business operations and implement changes to increase sales and to realized more competitive and profit based wages to limit cost and productivity. Furthermore, products in lower price segments and lower quality ratios were produced.

Case examples

However, as this information mainly theory based, a more practical approach shall investigate, whether these factors do indeed contribute to the majority of corporate failures in China. Hence, a little investigation shall highlight factors in further prominent cases.

A prominent strategic withdrawal happened in 2004 as the Dutch dairy group Friesland Coberco announced their strategic retreat as a result of "deteriorating conditions" on the milk market. Cai Jing, the marketing manager of the Chinese joint venture company, explained the market as being characterized by overproduction and saturation. China Daily also expressed that other “food giants such as Danone, Kraft and Parmalat had similar experiences in the country's milk and yogurt market”.  

According to a statement of Chief Financial Officer, Carol Tomé of The Home Depot Inc. in 2012, market entry of the Chinese market was relatively easy, as he mentioned, “We bought our way in", but market development, as well as the later market failure and exit, has been difficult at best. The company stated "significant differences" in shopping behavior as the main factor for their market retrieval.

The changing business environment, as well as increasing competition, has also been felt by the international conglomerate Tesco. The company announced the merger of their existing store network into a joint venture with China Resources Enterprise in 2014. This strategy can be seen as a strategic retreat as their stores were seeing decreasing sales during loss making.

Grant Reid, the president and CEO of Mars Inc., claims "it is important to understand that we do not look at China from a one-or two-year perspective”  . However, also emphasises that his investment strategy is long term because his company "can afford to look at the long-term", which is one of the reasons why Mars, Inc. established a global food safety centre in Beijing. Furthermore, he assesses the changing market conditions and operating environment as rather positive. However, highlights, that "from a business perspective he thinks it is all about making sure that we have the right products in the right packaging for the right occasion for the consumers at the right price point". He there for stresses the importance of a consumer orientated marketing and sales concept by stating the "consumer is our boss”.  

Table 1: Overview of company failure reasons in China

RESULTS

The examples show various reasons. For market failure in China. While some organisations have a hard time to cope with the changing business environment, others underestimated cultural differences of the consumers or fail to adjust. However, the failures also highlight factors such as resource availability, increasing operating costs and decreasing profit margin as problem factors for business activities in China.

As the factors for entry market failure seem to be different from company to company, a merely case based research can most likely not yield widely transferable results. Hence, a different approach must be found to create more transferable information. Two main factors can be mentioned when destructuring the factors for market failure. The first is the importance ofan practice and systematic market selection process in line with other international business activities. The second is the continued adjustment to market conditions and consumer behaviour.

Furthermore, it becomes evident, that companies do apply a different market entry approach. While some companies use an aggressive capital intensive waterfall extension principle, others tend to follow a more organic growth structure.  Nevertheless, gaining market knowledge and experience market seem vital to the business success. However, the analysis also illustrates, that companies with a slow expansion rate or a low market penetration rate might be overtaken by mostly Chinse competitors who hold vast financial capabilities. Especially the adaptation from product and service attributes can increase corporate performance.

The more competitive market environment results in the need for a more sophisticated market selection and market entry approach which also includes countermeasures in case of business failure.   The problem seems to be in most instances not the cognition of the need to adjust products and services but to nake the adjustments.   Hence, most companies fail in the resulting steps from market selection often due to insufficient market research and feasibility studies.   . The Chinese market is vast and offers many expansion options as long as the strategy fits the environment. However, companies must make better use of their financial advantage by realizing long-term advantages.  

The following chapter reviews the existing literature within the subject area to clarify the theoretical context of internationalisation and international market selection.

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