To Invade or Not to Invade? – John Haboush

The question of “To invade or not to invade?” is almost as old as humanity. Answers to this question have been the catalysts of revolutions, two world wars and hard learned lessons that shaped the history of human existence. Today, this question is at the forefront for foreign tech companies sizing-up the Chinese market. To offer some wisdom on how to best answer this question, John O’Connell and I interviewed Frank Hawke. Frank was one of the first American students to study at Peking University, in 1979. In addition, he was the former President of both Citi Bank and Salomon Brothers in China and is now a Stanford University Business School professor. If anyone has a qualified opinion on the question previously posed, it’s this gentleman.

Frank first began to answer this question in typical teacher fashion, with a study about eBay’s entrance into China in the early 2000’s. eBay had lots to gain from a successful Chinese campaign. China was not their first beachhead and their strategy was “business as usual.” Yet, after years of effort and millions of investment, eBay failed. When Frank explained this, we asked, “How could a company like eBay fail to plant themselves in the Chinese market?” Frank’s response was that eBay tried to force the Chinese consumers to adapt to their platform. eBay did not have enough assets on the ground to properly understand the Chinese consumer.

Seeing the glazed look of confusion in our eyes, he used a simple metaphor us geniuses could understand, “eBay tried to fit a round peg into a square hole. This is just not going to happen.” He went further when he asked, “Do you know why Jack Ma succeeded?” After a moment, he quickly stated, “Jack Ma built a platform just for Chinese consumers. He made a round hole for the round peg.” As Frank saw that we were starting to understand, he quickly moved to another well-known example, in Uber, to articulate his second point.

Uber has dominated markets across the globe. Yet, like eBay, they failed to take China. Frank began his explanation with stating that when Uber first came to China, Travis Kalanick claimed that he had learned from the lessons of eBay and that he was ready to embrace the Chinese market. What Travis missed, according to Frank, was the fact that Uber did not have global leverage. He defined global leverage as having technology or funding that their competitor, Didi, didn’t already have. In addition, this market meant everything to Didi, which meant that they would do anything to protect it. To explain, Frank moved to a scene from a movie. He asked us, “have you ever heard of the movie An Officer and a Gentleman?” Having only been old enough to have heard of a flip phone, we shook our heads no. He gave a slight sigh in something close to disappointment and started to explain the relevant scene.

“There were two main characters in the movie, Mayo and Sergeant Emil Foley. Mayo was the product of a military family. Ever since he was a kid, he moved from naval base to naval base against his will. He had no friends, became selfish, and had no place to call home. The Sergeant saw this attitude and worked to get Mayo to drop out of naval officer training. In one scene, the Sergeant is spraying Mayo with a hose while he is doing pushups in a foot of mud. The Sergeant then gets on the ground with Mayo and sprays him in the face while yelling “‘Mayo, why won’t you just quit!’” To which Mayo collapsed in the mud and responded “‘because I have nowhere to go!’” Frank went on to explain, “Mayo is like Didi, they have nowhere to go but China. Therefore, they were destined to win against Uber. They had something to fight for. Uber, on the other hand, could put their money anywhere.”

After hearing this story, the lessons that Frank was trying to convey had sunk in. If foreign companies fail to properly invest in China, they will not receive the benefits of China’s growing and extremely competitive market. Second, foreign companies need to have local assets to better understand how the Chinese consumer interacts with their product. Historically, Chinese companies have had a great deal of trouble adapting a successful business model from the Chinese market to the global market. Thus, they have nothing to lose. They will go into “all-out war” to defend their turf and force the invaders out, back into the sea.

 

THE EXPERT OPINION – Kevin Shimota

Historically, it has been difficult for foreign companies to expand into China, and vice-versa. John offers two important reasons, in that, foreign companies need better localization of resources and they face fierce competition in the local Chinese companies. I agree with this explanation, yet I would venture to study the topic further.

The need for localization to combat domestic competition are challenges of any foreign company trying to enter a new market. We can apply the example of Uber to another country, Brazil. Uber needed to localize, which meant having a local team and optimizing the product for local tastes. Uber faced domestic competitors, who better understood the needs of Brazilian consumers. So why did Uber succeed in Brazil, yet fail in China?

Historically, it’s been difficult for foreign companies to enter China. Similarly, it has been challenging for Chinese companies to expatriate. In the Brazil example, a local Brazilian competitor to Uber might consider refocusing efforts on neighboring Argentina and Ecuador, in effect, forfeiting their local market. Chinese companies would not follow such a strategy for various reasons – unique culture, disconnection from the outside world, geographic isolation, etc. – Chinese companies struggle to expand overseas. Consequently, Chinese companies focus on their domestic market and will fight tooth-and-nail against foreign competitors.

In Uber’s defense, they took China seriously. They made significant attempts to localize the product, have local operations, and burned around 1 billion USD a year, in China, on marketing and promotions (user subsidies). Insufficient localization does not adequately explain Uber’s plight in China. China and its local investment firms have raised massive amounts of capital. In terms of funding, Chinese firms now have major firepower. When Uber was burning around 1 billion USD a year, Didi was easily able to keep pace through raising tens of billions of dollars in funding, enabling them to defend their home turf.

In conclusion, foreign companies have both underestimated the opportunity and the local competition. They struggle to enter China just as Chinese companies struggle to leave. China is different. It is big and it sometimes seems like its own world. Chinese companies understand that world, and now they have the investment and resources to dominate it.