Multinational Mistakes: A Lesson for China, Too

Many of China's most successful companies have begun expanding abroad. Some, like home appliance-maker Haier, have already built manufacturing plants in the United States and have successfully staked out dominant market positions. Other Chinese companies, like Lenovo (LNVGY), have met with limited success when going abroad.

Ironically, these companies have fallen into many of the traps that multinational companies succumbed to when they first arrived in China such as bringing in products that were successful at home without adapting them to local tastes, depending on general managers without an understanding of the local market, or even entering the market in the first place without sound financial feasibility plans.

Just a few years ago, 70 percent of multinationals lost money in China. In 2007, more than 50 percent will make money here, having learned from their initial mistakes.

As more and more Chinese companies nurture global ambitions it will be interesting to see if they are successful like Haier or learn the hard way as many foreign companies did when entering China.

Baidu (BIDU) is the latest high-flying Chinese company to announce that it wants to push out internationally.

"We believe that our proven strength in non-English language search, the high Internet penetration in Japan, as well as similarities between the Chinese and Japanese languages make this market an ideal next step for Baidu," Robin Li, CEO of Baidu, said last December.

Baidu should heed the words many critics have lobbed towards multinationals when they entered China.

Different markets

Many brands that are No 1 in their home countries like Google (GOOG) have stalled in China in part because they were so successful in their home markets. They tried to implement in China what worked in the United States, without listening to the wants of local Chinese consumers.

Baidu should not think that just because there are character-based similarities between the Japanese and Chinese languages that their search methodologies will be better than those already developed by Yahoo (YHOO) and Google. There are questions over whether Baidu's search results are actually superior to those of Google China.

Another potential concern is that while the Japanese have aggressively incorporated technology coming from Europe and North America, they may be less likely to readily adopt technology coming out of China. However, Baidu does understand nationalism, as they have run their own advertising campaigns portraying outsiders as not understanding Chinese culture. It would be ironic if they become the foreigners not understanding the Japanese market.

To find success in Japan, Baidu will have to remember that Japan and China are different markets. Consumers have different needs so approaches that work in China will not necessarily transfer to Japan. The search engine business in Japan is not just about search and advertising. Much of the success that the Yahoo and Softbank achieved in Japan stems from their offering of other services including online shopping and auctions.

Finding the right talent

Baidu needs to make sure to avoid "lazy localization" in Japan. A lot of multinationals coming to China sent over managers from headquarters with little to no hands-on experience in the country. After years of failure, many of these companies realized that savvy local managers or foreigners who had made a career of working in China were better suited to the task because they knew how to navigate local market conditions.

Baidu needs to make sure that they hire the best management team with Japanese experience. This means lining up a team that the management in China can trust to make decisions, even if those decisions do not align perfectly with Baidu China's concept of how their efforts in Japan should unfold.

One wonders if Baidu actually has the in-house talent with experience in both countries. They have stated that they will find local talent to manage their Japan operations, but it is unclear who they will trust to bring in and run the show.

Pressure to expand

Baidu is currently ranked as the No 4 most-visited site globally by Alexa, sitting behind Yahoo, MSN (MSFT), and Google. Investors seeking increased returns from a good thing may be putting pressure on Baidu to expand its operations beyond its home market.

Over the last 52 weeks, Baidu's stock price has gone from $44.44 to $123.40 on January 29. November and December showed a strong run-up amidst rumors of Baidu's planned expansion into Japan.

Company growth is good but any company that expands into new markets needs to consider its long-term objectives. It should also make sure that it does not lose its edge in its home market, much as Lenovo lost market share in China after its senior executives got spread thin integrating IBM's (IBM) Thinkpad line.

Note: CMR analyst Ben Cavender contributed to this article. This article originally appeared on China Daily.

Comments

[LARRY OSSEI...:]

Greate piece... My question is.... What's don't American MNCs invest the funds into research all the variables that you mentioned are needed to be successful in foreign markets? It seems like common sense to me. I would like to hear to your thoughts.

2007 Feb 07 02:25 PM

[Shaun Rein:]

I will be a little facetious in my response, Larry. You served up a great question for me to sell myself.

I wish more MNCs did indeed see the value of high end market intelligence since I run a market research firm. And as I wrote in Invest in China's Wedding Fever, china.seekingalpha.com..., one of my analysts just got married and is hunkering for a bigger bonus next year!

We have found that the best run MNCs are indeed investing the money necessary to get the best market intelligence for international operations. Unlike even a decade ago, international markets accounted for so little revenue. Now, markets like China or India have become of such strategic importance to MNCs, not just for outsourcing but also selling to Chinese and Indian consumer, that companies now realize the importance of good info.

From my own experience with my clients expanding or just entering China, most of them are best of breed companies whose returns beat the S&P or make a ton of money if they are hedge funds/ VC firms or private firms. Others are turnaround cases that need top-end information to retake lost market share. I once helped a company that was a distressed debt acquisition by a big buy-out fund in New York. I advised them on relocating part of their operations to China. The buy-out fund saw a 8 digit return on their initial investment.

The good news for investors is that more MNCs are using the consulting services of premium firms like a McKinsey or CMR because the ROI is noticeable. China will fuel more and more the bottom-lines of many MNCs in the coming years like a Corning or Starwood.

Sorry for the semi-marketing response, but I could not resist it.

Shaun Rein

2007 Feb 07 08:57 PM