9/7/2019 Why Western Digital Firms Have Failed in China

GLOBAL STRATEGY

Why Western Digital Firms Have

Failed in China
by Feng Li
AUGUST 14, 2018

PAPER BOAT CREATIVE/GETTY IMAGES

Many leading American digital firms, including Google, Amazon, eBay, and Uber, have
successfully expanded internationally by introducing their products, services, and platforms in
other countries. However, they have all failed in China, the world’s largest digital market.

The widely touted reasons for these failures include censorship by the Chinese government and
cultural differences between China and the West. While these factors undoubtedly have played a
role, such explanations are overly simplistic. Google, for example, has succeeded in dominating
many foreign markets that have radically different political systems and cultures (including
Indonesia, Thailand, and Saudi Arabia). And these factors have not stopped Western
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multinationals from succeeding in China in car manufacturing, fast-moving consumer goods, and
even sectors where culture plays a key role, such as beer, coffee shops, fast food, and the film
industry. There are deeper reasons behind the systematic failure of Western digital firms in
China. (The term “digital firms” refers to those companies that from their inception have focused
on digital services enabled by the internet and related technologies, including mobile. It does not
include traditional IT firms that rely on sales of hardware or software as their main source of
revenue.)

And yet Western digital firms haven’t given up on trying to tap into China’s rapidly growing
market. Google is reentering China by setting up new offices and an AI center, signing new deals
with retail heavyweights JD.com and Tencent, rolling out new products (including a controversial
local mobile search app that would strictly censor results), and investing in promising local
startups. Airbnb, LinkedIn, and WeWork are also expanding their presences in China. Amazon is
expanding its China business in cross border e-commerce, Amazon Prime, and Amazon Web
Services.

The question is, will this be sufficient? What could these firms do differently this time to
succeed?

“Death by a Thousand Cuts”

Based on a comprehensive five-year study, my new research paper, published in the Academy of
Management Discoveries this year, systematically identifies the reasons behind the failures of
major Western digital firms in China. This study uses two rounds of interviewing to identify what
the Nobel laureate Daniel Kahneman describes as the “inside view” and the “outside view” of the
phenomenon.

First, interviews were conducted with 40 senior business executives from six leading Western
digital firms (Google, Yahoo, eBay, Amazon, Groupon, and Uber) and their corresponding direct
competitors in China (Baidu, Sohu, Taobao, JD.com, Meituan, and Didi). This was intended to
identify the inside view of the phenomenon. The prevailing narrative emerging from these
interviews points to a lack of strategic determination and patience by Western digital firms as the
main cause of their failure. This is reflected in seven factors:

lack of a deep (enough) understanding of the Chinese market

poor management of relations with Chinese regulators and the government
ill-fated attempts to impose global business models unsuited to the Chinese market
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 9/7/2019 Why Western Digital Firms Have Failed in China
failure to cope with the extremely fierce competition in China
failure to manage relations effectively with local business partners
imposing technological platforms developed for the U.S. market on China
overly centralized organizational structure’s leading to slow decision making

Second, 185 seasoned expert observers were interviewed in China to identify the outside view on
the phenomenon. These interviews highlighted the failure by Western digital firms to acclimate
to China’s business environment as the main cause of their failure. This was described in Chinese
as Bujie diqi (不接地气), meaning these firms failed to “keep their feet firmly on the ground.” It led
to a series of competitive disadvantages, thereby allowing Chinese digital firms to race ahead in
the fight for market share. Specific factors identified included:

failure to cope with a very large number of local competitors

failure to cope with extremely aggressive and determined local competitors
underestimating the major differences between digital business and other industries
failure to develop and communicate business strategies effectively
ineffective innovation strategies
failure to fully embed operations in China

Despite the differences between the inside view and the outside view, these factors have
converged in three clusters: (1) poor understanding of the business environment, (2) ineffective
strategy making and communication, and (3) underperformance in operation and execution. The
Western firms’ failures in China were not due to one specific factor, but rather to the cumulative
effects of multiple factors over time. “It’s death by a thousand cuts!” remarked a former senior
executive from eBay.

To date, Western digital firms have failed to

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While Western multinationals from other sectors benefit from advanced technologies,
established product lines, and global supply chains that may take Chinese firms years of
investment to catch up to, digital firms do not. They operate in an environment where the
barriers to entry are relatively low and the focus of competition is on product and business model
innovations and service delivery, rather than the most advanced technologies.

Can They Get Back in the Game?

Are Western digital firms forever doomed to fail in the Chinese market? The answer, of course, is
no. The problems are not insurmountable, but the size and dynamism of the Chinese digital
market suggest that any solutions that focus only on those problems are unlikely to be sufficient.
The competitive advantages that have served Western digital firms well in other countries need
to be recalibrated for the Chinese market. Three lessons here are particularly important.

1. Doing everything right is not enough. China has huge geographical disparities and
socioeconomic variations across its regions. Its institutional environment and market preferences
evolve rapidly and sometimes even erratically. Dominating and maintaining dominance in China
poses unique challenges. Unlike other digital markets, doing everything right in China is often
not enough to guarantee success, due to strong competition.

Take Uber. Before entering China, Uber senior leaders did their homework carefully to avoid the
mistakes that had derailed many other (digital and not) multinational firms. Uber set up a highly
autonomous Chinese subsidiary; partnered with China’s largest search engine, Baidu; committed
significant capital and paid out $2 billion in subsidies to win market share; and offered services
specially tailored to the Chinese market. Uber’s founder and CEO at the time, Travis Kalanick,
took a hands-on role and spent over 20% of his time in China.

Despite all this, Uber wound up retreating from the Chinese market. What went wrong? It is hard
to pinpoint any individual failure on Uber’s part. One notable challenge, however, is that for the
first time, Uber met a genuine competitor: Didi Chuxing, which was more determined, had a
larger cash reserve, and focused exclusively on China at that time. Uber sold its operation to Didi
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Chuxing. This case suggests that simply addressing each of the known mistakes made by other
multinationals in the past is often not enough to guarantee success in the future. A more holistic
approach is needed.

2. Accumulating incremental advantages in the “winner takes all” digital market. While radical
innovations in products, business models, and technologies capture the most headlines, due to
their importance to the long-term competitiveness of digital firms, what’s often overlooked is
that accumulating incremental advantages across different areas of competition over time is also
essential for survival.

The digital market is significantly different from other market sectors. Western digital firms had
only a short history to establish any inimitable advantages. The focus of digital firms on product
and business model innovations, and the relatively low technological entry barriers, allowed a
very large number of Chinese competitors to appear. As a culture market, China favors native
firms, as they are often better at understanding users and the business environment. Local firms
are also more adept at managing relationships with regulatory bodies and thereby influencing
and anticipating regulatory changes. The technologies and intellectual property that Western
digital firms rely on are often easily imitated and then adapted to local tastes in the digital space.

In the “winner takes all” digital market, where usually only one or two players survive in each
market niche, incremental advantages can snowball and have increasing returns to scale. The
cumulative effect from any such advantage can become what separates winners from losers.

3. Experimental approaches to strategy and innovation. The enormous uncertainties in the

rapidly evolving digital markets call for experimental approaches to both strategy and
innovation. New ideas can become obsolete before they are fully implemented, requiring
frequent recalibration of the course and destination of business strategy. Innovation through
experimentation and improvisation is vital for success. But such experimental approaches are
only feasible with strong autonomy by local management, local product and technical teams,
and, in many cases, business models tailor-made for the Chinese market.

Winning in the New Digital Economy

Western digital businesses have not given up on China. However, to get back in the game and
win, Western digital firms need to bring forward genuine competitive advantages. In addition to
customizing their products, platforms, and business models for China, and empowering local

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management teams to compete for market share, these firms must also learn from Chinese digital
firms how to integrate online and offline operations and build new partnerships and ecosystems.

As the digital market in China continues to expand rapidly, a growing number of digital startups
have joined the ranks of the largest unicorns in the world. And as Chinese digital firms grow
larger and more confident, they are actively pursuing new opportunities in other international
markets — India, Southeast Asia, Africa, Europe, and even the U.S. So the clashes between
Western and Chinese digital firms will continue to escalate both in China and internationally.

Beyond digital businesses, similar patterns have been observed in cloud services, mobile
communications, fintech, and several non-digital sectors (such as solar energy, electric cars, and
high-speed trains). Further, new battle lines have been drawn between Western and Chinese
firms for artificial intelligence, driverless vehicles, and industries where Western multinationals
have traditionally held major technological advantages (say, pharmaceuticals). The ongoing trade
dispute between the U.S. and China is likely to further complicate the situation.

To capture a slice of the Chinese market, Western business leaders must recognize and
understand the issues highlighted here. These lessons are relevant to more than Western digital
businesses in China; they can also shed light on the future competition between Western and
Chinese multinationals in other sectors and other international markets.

Feng Li (PhD, FBAM) is Chair of Information Management and Head of Technology and Innovation Management at
Cass Business School. For three decades, his research has focused on how digital technologies can be used to facilitate
strategic innovation and organization transformation in different sectors and domains. He appears regularly as an expert
commentator on TV and radio and in newspapers. He is an elected Fellow of the British Academy of Management.

This article is about GLOBAL STRATEGY

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9/7/2019 Why Western Digital Firms Have Failed in China

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7 COMMENTS

Lillian S 4 months ago

I honestly think poforlio investment makes much more sense. As the other comments said, the entire regulatory
enviroment is hostile to foreign investment and there are so many devils in details for foreign companies to
incorporate in order to be simply compliant in China, which further slows down the speed to market. In the past
10-15 years, the most sucessful foreign investment is China is Yahoo's Alibaba investment, and maybe also Uber's
didi investment and Walmart's JD investment given longer time. Just invest for a stake and enjoy the market
growth. The busienss model (against anti-trust law in US) and the tactics (against busines ethics) taken by
Chinese companies may never be understood by Western companies. It is too wild.

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