• FILLING A NICHE NEED

    In 2008, it was years of sector specialization and research that allowed a local Chinese detergent brand called Blue Moon to succeed in breaking into a Chinese market dominated by UnileverProcter & Gamble, and other multinational companies. The smaller company succeeded because it noticed something about the laundry detergent sector that the big companies missed.

    While the multinationals focused on new products for washing machines, Blue Moon realized a significant portion of the Chinese population was more traditional and still hand-washed their clothes. Laundry powder was available for hand-washing clothes, but Blue Moon introduced a liquid hand-washing detergent that provided a better experience (no clumping!). Even after the other companies caught up, Blue Moon had snagged a steady 30% of the liquid detergent market.

    That’s what happens when you combine cultural sensitivity with careful observation of industry trends. Of course, it helped that they were backed by one of Asia’s top hedge funds, Hillhouse Capital, which makes investments and gives advice to Chinese start-ups.

    But even after their initial success, the company didn’t stop their momentum. They continued to launch the detergent that worked, focusing on their best-selling SKU instead of branching into various new detergents.Instead, they spent money on research and marketing. In 2011, a full three years after they successfully broke into the market, they spent USD 500 million alone for advertising. Their executives also met with a team from JD.com, one of China’s largest on-line marketplaces, to find ways to make the delivery process more efficient; they redesigned their detergent carton to fit with JD’s online delivery boxes.

    In 2012, they cut advertising but then hired salespeople to directly interact with customers in supermarkets, asking them to sample-smell patches of the detergent as if it were a perfume in a department store. They were constantly trying new strategies to present themselves not as the most affordable in their industry but instead “different and desirable.”

    Key Takeaways

    Even small brands can beat huge multinationals, as long as they understand their particular consumers’ needs more than their competitors. Blue Moon proved that with its breakthrough liquid laundry detergent for the segment of Chinese population that still hand-washed clothes. It solved a problem that no other company solved for these people, and they won loyal customers. Even after initial success though, Blue Moon didn’t stop R&D and marketing: they kept striving to know more and to show it.

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  • DOING THINGS THE CHINESE WAY: GUANXI

     

    In the early 1990’s, prospects were good for the growth of tourism and investment in Yunnan, a province with unique ethnicities and bountiful nature in Southwest China. The Roaring Dragon at that time was a well-known 40-year-old four-star hotel, one of the first in the region, owned by the provincial government and managed by local Chinese.

    But as a state-owned enterprise, their close to 700 staff lacked motivation since steady salaries would be paid for by the government in any case, and even though the hotel was still profitable, the government thought it wasn’t meeting its potential.

    And so the government contracted foreign management companies to take over: One takeover in 1993 lost them nine million RMB in a year. The second one in 1999, by another international hotel brand, lost more than ten million RMB in less than four months, with hotel capacity nearing emptytowards the end.

    In between these two periods, when Chinese management retook the system, the hotel did well again. It was clear that the foreign management did have better standards of services and more high-class hotel experience. But their international reputation did nothing to attract visitors; in fact, it sometimes seemed arrogant.

    Both times, foreign-educated managers neglected the Chinese element of guanxi, or connections. These connections always came with a price: they were relationships of “you help me, I help you.” Giving discounts to friends in tour agencies meant they would bring their groups to you. Hosting banquets in honor of government officials meant you could pass through bureaucratic processes much more smoothly. Hiring your friends or relatives meant they owed you something. The regular up-dating of these guanxi—meals, tea, gifts, even leisurely chats over nothing—were essential for relationship maintenance of mutual benefit.

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    Guanxi is effective, but it is not always efficient.Foreign managers at the Roaring Dragon saw it simply as favoritism or nepotism; they banned discounts, hiring based on connections, and other incentives based on guanxi. Once, a foreign F&B manager outright refused a tour group a banquet because he deemed it too cheap. The tour agency, which another Chinese manager had carefully cultivated guanxi with and which often booked large groups into the hotel, never booked tour groups in the hotel again. The guanxi was ruined, and the agent left to a competitor. Government officials were no longer given star treatment and discounts, so they left, too.

     Employees also complained that “the foreign management did not know the Chinese way”: they were no longer allowed to take long breaks, to invite their friends to the hotel for no reason, even to eat with each other as per new schedules. Long-time employees who were made redundant complained of not being treated with respect, since they were being laid off and paid on a single day without prior notice. Employee morale had depressed so much that even if they were not made redundant under new policies, many high-level employees left of their own accord, oftentimes with years of guanxi.

    Guanxi, because it is so personal, is something that is not transferable. In their quest to make everything more efficient, foreign managers had actually lost the very business and people they sought to attract.

     

    KEY TAKEAWAYS

    Guanxi are like the Chinese version of business networks, but wider-ranging and more informal. They make the carefully cultivated interdependent webs that much of Chinese business lives in. Guanxi is more than friendliness in China; it is how things can get done, through one favor or another. As foreign managers at the Roaring Dragon learned, don’t neglect guanxi for the sake of cold efficiency, because it may be more important than you think. People are the ones who answer the questions, place the orders, give you customers, and do the work in the end.

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  • Hello world of China enthusiasts and entrepreneurs!

     

    Whether you’re an old China hand or simply dreaming about the Middle Kingdom, here’s some disheartening news: Forbes states that just under half of foreign businesses (including multi-national corporations) fail in China within two years of entering the market. Meanwhile, according to Bloomberg, 8 out of 10 start-ups flop in the first 18 months globally.

    LITAO is a Lithuanian-capital Wholly Foreign-Owned Enterprise. Since starting operations in December 2014 (we passed the two-year cut-off!), we have been following the fast-moving China trends on the news, through numerous books and reports, and most importantly of course, via our clients on the ground.

    Three years and many mistakes later, we’re stronger than ever—and we feel confident that our unusual methods of business work. Our secret? Strategy!

    To our surprise, we were unable to find a single blog that consistently provides quality content on the nitty gritty of East/West strategy: cultural, political, and logistical. We would like to fill that void with case studies of how others have succeeded or failed in the art of cross-cultural business—what we have learned and what you can benefit from learning.

    Every Tuesday, you will find an original post in three languages: English, Chinese, and Lithuanian. Don’t miss out—this is high-level information presented in accessible story-telling and every post will have something actionable for your next venture. Join us—