Executive Insights:

Marketing Strategy in Emerging Markets: The Case of China

The Chinese market's attractiveness to international marketers ABSTRACT has recently received a significant boost as a result of the country's admission into the World Trade Organization. Membership in the World Trade Organization requires trade barriers to be reduced and new sectors of the economy to be opened to foreign firms according to a predesignated timetable, which in turn will make this most populous country a promising market for marketers. Despite these positive developments, acquiring reliable information and, in particular, the understanding of the market presents big challenges to the development of a viable Chinese marketing strategy. In this article, the authors explore barriers to information acquisition in China and focus on the need to understand crucial dimensions of the operating environment with respect to internal protectionism, relationship development, the diversity of the market, and competitive contexts.

Following its accession to the World Trade Organization (WTO), the promise of China as an emerging and lucrative market has attracted increasing interest from marketers around the world. By most accounts, China's market is expected to continue to grow and develop rapidly. For example, Kenichi Ohmae recently stated that "it took the Asian tigers more than fifteen years to build their economies as symbols of new development, ... it is taking China only a few years to supplant them" (McGregor and Bala 2002, p. 33). This perspective reflects two decades of blistering Chinese economic growth and, in particular, a situation in which China is capturing an increasing share of world export and global foreign direct investment flows at the expense of many other Asian economies (United Nations 2001). As a result of these developments, Chinese per capita gross domestic product has quadrupled over the past two decades, and China has emerged as the second largest economy in the world, as measured by purchasing power parity gross domestic product (Dahlman and Aubert 2001). Rapid economic growth in China is accompanied with a fundamental transition from a command to a market-based economy and from a rvu"al society based on agriculture to an in:ban, industrial one. The outlook for continued rapid growth is good, and if cvirrent performance continues, annual income per capita should exceed US$6,500 by 2020. This prospect, in addition to the vast

Peter G.P. Walters and Saeed Samiee

Submitted June 2002 Accepted September 2002 Joumai of Intemationai Marketing Vol. 11. No. 1, 2003. pp. 97-106 ISSN 1069-031X

97

size and potential of the Chinese market and the attractions of China as an export platform, has stimulated growing interest from foreign husiness enterprises. Consequently, China has already attracted some US$350 hillion of foreign direct investment since the start of economic reform, and the pace of investment has increased following WTO membership. Despite the recent recession, China's industrial output and exports increased by more than 10% in the first quarter of 2002. Foreign direct investment into the mainland did even better in the first four months of 2002, growing by 29% to more than US$14 billion. Strong momentum is being provided by China's accession to the WTO in 2001, which significantly reduced many trade barriers and opened up new sectors of the domestic market to foreign firms. In the long run, there is also the prospect that China will join the Association of Southeast Asian Nations, which would then constitute the world's largest free trade area, with an overall population of 1.7 billion. Despite the dramatic impact of economic reform and the drive for modernization over the past two decades, it is vital to understand that the Chinese market has many special characteristics that make it a challenging place in which to do business. Furthermore, access to reliable information about China is essential in developing an accurate picture of the market and the operating context. Such information is a prerequisite for strategy development and implementation (Agiular 1967; Hofer and Schendel 1978; Porter 1980), and though the importance of information for market planning is generally well understood by firms, many challenges and obstacles must be overcome when gathering information in developing and emerging markets. Indeed, the literature suggests that the lack of reliable information is a key reason for the absence of formal corporate planning activities in many developing markets (Adegbite 1986; Anastos, Bedos, and Seaman 1980; Mrema 1987). China is no exception in this regard, and as a consequence, when firms seek to enter the market, corporate ambitions need to be tempered by caution and, ideally, replaced with careful planning. In this article, we outline critical information acquisition problems that are likely to inhibit the planning process and highlight important contextual factors that are easily overlooked by international marketers that are not intimately familiar with the business environment in China. Cognizance of these factors should facilitate firms' market entry and planning processes and help them develop a viable Chinese marketing strategy. Obtaining reliable, accurate, and up-to-date information on market conditions in China at macro- and microlevels is often problematic (Roy, Walters, and Luk 2001). This is a major Peter G.P. Walters and Saeed Samiee

iNfFORMATION ACQUISITION

98

concern given the dynamic and rapidly changing nature of the Chinese market. For example, one market researcher has commented that many Chinese consumers are evolving rapidly and that "their tastes change before market researchers can figure out what turns them on" (Kahn 2002). Thus, common assumptions that Chinese consumers do not appreciate subtle, clever advertising are often wrong, especially in major cities where research has uncovered "a savvy urban population, tired of a diet of boring advertisements and hungry to be treated as the sophisticated decision makers they are" (Flagg 2001). Principal barriers to market research include the geographic scale, size, and diversity of the Chinese market. There are major differences in economic development, purchasing power, and cultural factors both between and within regions. As a result, consumer attitudes and patterns of behavior can vary sharply across mainland China. Infrastructure problems and the size and heterogeneity of the marketplace make it hard to identify and select representative samples for survey research. Although a national census was recently undertaken, some experts claim that tens of millions of Chinese may not have been counted because of factors such as a large group of unreported migrant workers and families hiding unregistered children (Becker 2001). Reliable and comprehensive lists that could form the basis for a sampling frame are often not available, and even when good sampling frames can be delineated, it is often necessary to obtain permission from the relevant authorities before collecting data. Although government oversight has been relaxed over time, controls are still in place, and there is a lack of transparency and clear guidelines as to what are sensitive topics. When collecting primary data in China, special care must be given in developing questionnaires. Key problem areas include construct and measurement equivalence and related language issues. For example, concepts derived in the West may be unfamiliar in China and difficult to translate into Chinese (Bond and Hwang 1986). In Sekaran's (1981) guidelines for cross-cultural research, she notes that it is the investigator's responsibility to examine the appropriateness and the transferability of the non-Chinese concepts into China and from one region to another within China before using such concepts for market planning. It has also been noted that Chinese respondents have a tendency to select midrange values when presented with a research instrument that includes rating scales (Shenkar 1994). This pattern is commonly referred to as the extreme response style, which is difficult to account for and may result in three possible outcomes (Chun, Campbell, and Yoo 1974; Samiee Marketing Strategy in Emerging Markets gg

and Jeong 1994). The first consequence is that the investigator will be unable to correctly interpret group means within China. The second consequence is that the measin-es will affect other statistical measures, for example, the level of item correlations within a construct, which in turn spuriously raise or lower internal consistency measures. The third consequence is that the extreme response style differences for the data set gathered from multiple heterogeneous groups will influence the analyses of the study's underlying dimensions. Survey implementation also presents many challenges that arise from factors such as a slow and unreliable postal service, topic sensitivity, a tradition of silence, and "face" issues. Thus, the use of research techniques such as focus groups is inhibited by participants' reluctance to speak freely and frankly in a cultural context in which there is a tendency that "those who know do not speak, and those who speak do not know." It follows that researchers must devise new ways to gather information, and because the pace of change is rapid, consumer studies need frequent updating. The quality of the secondary data published by the National Bureau of Statistics and other research institutes is often compromised by a need to rely heavily on data that are reported by regional and local authorities. Indeed, it is widely argued that most of the Chinese official statistics are inaccurate (The Economist 1999). Political pressures to inflate performance; the large chunks of the private and service sector that go uncounted; and technical factors, such as how to set the inflation deflator, have been identified as primary reasons for inaccurate secondary data. At the firm level, reliable performance data, particularly accounting information, are often not readily available. Reliable sales and market share data are also hard to obtain, which makes it more difficult to monitor the performance of local competitors. The problems identified previously greatly complicate access to information and, therefore, market planning and marketing decision making. As a result, companies such as Unilever and Procter & Camble have found that the power of their brands is not enough to compensate for their lack of understanding of local consumers and the challenge of more knowledgeable local competitors. For example, foreign firms are finding that what sells in Shanghai is no guide to the rest of China. ==^^^^==^^=^===^
INTERNAL PROTECTIONISM

Although the central government has pledged to fulfill china's W T O commitments, ensuring full compliance will take time and considerable effort because of the presence of significant inertia in the Chinese institutional structure. Thus, as of December 2001, the government had not issued Peter G.P. Walters and Saeed Samiee

200

an official Chinese language version of the WTO agreement. More important, local support in the implementation of the agreement may not be forthcoming in many regions, particularly if local enterprises are likely to suffer from heightened competitive pressures as a result of WTO compliance. It is noteworthy that regional protectionism flourishes in China, as provincial and city authorities have developed market entry barriers that are designed to support local firms at the expense of their competitors based in other regions in China. For example, product standards for taxis are often manipulated to ensure that only vehicles produced at a local plant fulfill the specified requirements. Another example relates to corporate capital equipment purchasing plans, which often must be endorsed by local bureaucrats. Not infrequently, these officials favor local equipment suppliers, thus penalizing both foreign-sourced products and those from other Chinese provinces (Shirk 2002). The basis for local protectionism arises from the usual misconceived notions that this supports local employment and guanxi relationships developed over many years between local businessmen and officials. The importance of successful local enterprises as tax "cash cows" reinforces the tendency of officials to support local firms that might be pressured by external competition. Institutional and regional pressures, coupled with the possibility of using the usual array of nontariff barriers implemented by many national governments, indicate that protectionist forces are likely to remain strong in many local Chinese markets, irrespective of the country's membership in the WTO. Thus, even when manufacturing takes place in the mainland, there may be significant, locally driven trade barriers that need to be surmounted when firms market in "distant" regions. This prospect is greatest in provinces where there is limited foreign direct investment and relatively few private firms able to provide the jobs, tax revenue, and social benefits currently provided by local state-owned enterprises. In China, the notion of guanxi has particular importance in business matters, and it has been identified as a critical business success factor by executives involved in business in China (Levmg, Wong, and Wong 1996). Guanxi is defined as "the set of personal connections which an individual may draw upon to secure resources or advantage when doing business or in the course of social life" (Davies 1995, p.155). Particularistic ties are crucial for the development of many guanxi relationships that result from a common background and experience in terms of factors such as where people come from, their schooling, and their work. The expectation in a guanxi network is that relationships will be maintained and that participants will do favors for one another on a reciprocal basis. GUANXI

Marketing Strategy in Emerging Markets

The importance of establishing personal connections is not a unique Chinese phenomenon. Access to networks of social and business connections is an important resource in most, if not all, cultures. However, in China personal business relationships are particularly important because the legal system is complicated, often not transparent, and may even be contradictory. This situation is primarily driven by the multiple layers of government at the national, provincial, and local levels. Laws and regulations are promulgated at each level, and coordination of the legal context between the different layers of the bureaucracy is weak. China's extensive bureaucracy also has not fully codified and diffused the laws on enterprise regulation, and the rules are not consistently enforced (Boisot and Child 1996). As a result, law enforcement is frequently weak, can be arbitrary, and is open to corruption. Private businesses and foreigners are particularly likely to face problems in this environment unless they are able to obtain help in navigating the complex legal and bureaucratic systems with which they must interact. Because individual officials often have considerable leeway to interpret the law and regulatory procedures, they are able to exercise significant and arbitrary influence over many aspects of business activity. It follows that establishing close relationships with relevant power networks through activities designed to build mutual obligation is often essential and is much more important in China than in most other societies (Bjorkman and Kock 1995). Therefore, senior managers need to devote considerable time and effort to cultivate and maintain a network of appropriate relationships with government and other officials at the national, regional, and local levels. This may involve providing favors, giving gifts, and attending to other personal or social activities that may be perceived as questionable in a non-Chinese context. =^^^^^=^==^^^=^=
MARKET DIVERSITY

The large size of the Chinese market in terms of geographic scope and population is well known. What is much less understood are the disparities within and between the provinces that make up this large country. Differences in natural endowments are to be expected, but in addition, there are major disparities in economic performance, infrastructure, and standard of living. Thus, it has been noted that "Parts of such prosperous areas as Beijing, Shanghai, and Tianjin are very much like first-world countries. Parts of the poorest provinces appear to be several centuries behind in their technology and living standards" (Dahlman and Aubert 2001, p. 43). An indicator of such disparities relates to regional comparisons of knowledge variables such as research and development input and output, foreign direct investment, education, and information. When such criteria are used in the form of a

102

Peter G.P. Walters and Saeed Samiee

knowledge index, Beijing and Shanghai exceed the national average knowledge intensity level by 610% and 530%, respectively. In contrast, areas such as Qinghai and Cuizhou lie at only 44% and 38% of the national average, respectively (Hu and Yizhi 2000). The implication of such vast differences is that China generally should not be regarded as a single, homogeneous market. It is clear that infrastructure, income, and other disparities imply that not all regions are equally attractive as potential markets and that marketing policies may need to be adapted significantly from area to area within the mainland. Markets in China are characterized by intense competition, and more often than not, the toughest competitors are locally owned enterprises. For example, in the four biggest markets for fast-moving consumer goods (i.e., shampoo, soap, laundry detergent, and skin moisturizer), local brands dominate in terms of sales volume despite the intensive efforts of foreign multinational corporations (MNCs; Flagg 2001). Production beyond customary market needs is common in Chinese firms. This is especially true in industries in which heavily subsidized state enterprises are able to obtain support from local banks and governments, which in turn make overproduction and aggressive discounting possible. Thus, in the highly competitive construction equipment business, Chinese vehicles sell for one-third or less than the price of imports in many product categories, and despite intense competition, there has been little rationalization in the industry. Although most of the local manufacturers lose money, many local firms are shielded from normal financial pressures as a result of privileged access to financing from banks and local government institutions that do not demand loan repayment when firms are faced with economic downturns (Terry 2002). Some Chinese companies have also proved to be more effective than their foreign competitors in developing products and marketing strategies appropriate for the Chinese market. Targeting the mass market with low-priced new products that are tailor-made for the local market and widely distributed, Chinese firms often develop strength in the regions before moving to highly competitive markets such as Beijing and Shanghai (Boston Consulting Croup 2000). In many markets, Chinese consumers are less willing than expected by some MNCs to pay premium prices for heavily promoted foreign brands, which are not widely available and are frequently not modified enough to suit local tastes. Competition from other foreign suppliers, along with the widespread problem of counterfeiting, can also result in losses even when the challenge from local competitors is relatively weak. ^^^^^^^^^^^^^^^^ COMPETITION

Marketing Strategy in Emerging Markets

103

"""""^^^^^""^^^^^^^^
INTERNATIONAL MARKETING IMPLICATIONS

Several conclusions and recommendations can be drawn from the preceding analysis. Perhaps the key recommendation is not to be blinded by the long-term potential of the Chinese market. Careful analysis should precede market entry. Particular danger signals to note include manufacturing overcapacity and intensive price competition. Even when prospects seem good, other foreign and local enterprises will be interested in attractive opportunities, and deep pockets are often needed for success in China. Although WTO membership should lead to significant reductions in external tariff and other entry barriers, localized internal barriers will remain important. Even though such barriers may be illegal, they are difficult to circumvent, as entrenched local companies, often owned and taxed by the local government, seek to ensure continued protection at the regional level. It is also vital not to underestimate the intensity of local competition. Chinese enterprises tend to know and understand local consumers and workers better than their foreign competitors and have exhibited a surprising capability to develop and successfully implement well-thought-out marketing strategies. In addition to developing strong production and marketing skills, Chinese firms may enjoy financial and other support from local authorities and banks that are not available to MNCs or even to Chinese competitors that lack production facilities in the region in which they want to compete. Establishing appropriate connections at the national, regional, and local levels is ofren necessary to develop effective business operations. Therefore, guanxi networks need to be carefully developed and cultivated, possibly through recruiting staff with the right connections. It is also important to remember that national connections are frequently not enough to gain clout at regional and local levels. Upscale differentiation intended to provide greater latitude in premium pricing in Western markets tends to be difficult to achieve in China, given the intense competition, relatively low income levels, and heavy promotional spending by many enterprises. In many respects, much of China resembles a mass market, and by and large, it should be treated as such. However, upscale differentiation within much smaller niche markets is still possible. This implies a need to engage in the identification and cultivation of niche market segments and creatively develop products and advertising that stand out and respond to the specific needs of these niche markets. Finally, foreign firms should not be seduced by the mirage of "middle-class" markets where premium pricing, strong brands, and heavy promotion are perceived as the path to

104

Peter G.P. Walters and Saeed Samiee

success. In China, the middle class is often defined in terms of the 100 million or so consumers whose household incomes exceed US$3,000. The great majority of consumers in China are not rich in a Western sense; they are often pricesensitive and resistant to the heavy advertising to which they are already subjected. As a result, creative policies that involve developing new price competitive products and innovative promotion and distribution methods become particularly important for success in this increasingly demanding market. Adegbite, O. (1986), "Planning in Nigerian Business," Long Range Planning, 19 (4], 98-103. Aguilar, F.J. (1967), Scanning of the Business Environments. New York: Macmillan. Anastos, D., A. Bedos, and B. Seaman (1980), "The Development of Modern Management Practices in Saudi Arabia," Coiumbia Journal of World Business, 15 (2), 81-92. Becker, J. (2001), "Evasive Citizens Throw Spanner in Works," South China Morning Post, (March 29). Bjorkman, I. and S. Kock (1995), "Social Relationships and Business Networks: The Case of Western Companies in China," International Business Review, 4 (4), 519-35. Boisot, M. and J. Child (1966), "From Fiefs to Clans and Net Work Capitalism: Explaining China's Emerging Economic Order," Administrative Science Quarterly, 41 (4), 600-28. Bond M.H. and K.K. Hwang (1986), "The Social Psychology of Chinese People," in The Psychology of the Chinese People, M.H. Bond, ed. Hong Kong: Oxford University Press. Boston Consulting Group (2000), Avoiding Stalemate in China. Boston: Boston Consulting Group. Ghun, Ki-Taek, John B. Campbell, and Jong Hae Yoo (1974), "Extreme Research Style in Cross-Gultural Research," Journal of Cross-Cultural Psychology, 5 (December), 456-80. Dahlman, G.J. and J.E. Aubert (2001), China and the Knowledge Economy. Washington, DC: World Bank Institute. Davies, H.A. (1995), "Interpreting Guanxi: The Role of Personal Connections in a High Context Transitional Economy," in China Business: Context and Issues, Howard Davies, ed. Hong Kong: Longman Asia, 155-69. The Economist (1999), "Through a Glass, Darkly," (January 9), 68-69. Flagg, M. (2001), "Savvy Urban People in China Want More than Simple Ads," Asian Wall Street Journal, (June 9). Hofer, C.W. andD. Scbendel (1978), Strategy Formulation: Analytical Concepts. St. Paul, MN: West Publishing. Hu, A. and X. Yizbi (2000), "China's Regional Gaps in Knowledge Development, Gauses and Gountermeasures," working paper, Tsingbua University. Kahn, G. (2002), "Ad Companies Seek New Ways to Ghart Gbanges in Gbina," Asian Wall Street Journal, (April 24). ^^^^^^^^^'^^^^^^^^^'^"''^ REFERENCES

Marketing Stra tegy in Em erging Markets

105

THE AUTHORS Peter G.P. Walters is Chair of the Department of Business Studies, The Hong Kong Polytechnic University. Saeed Samiee is Collins Professor of Marketing and International Business, Coiiege of Business Administration, University of Tuisa.

Leung, T, Y.H. Wong, and S. Wong (1996), "A Study of Hong Kong Businessmen's Perceptions of the Role of Guanxi in the People's Republic of Gbina," Journai of Business Ethics, 15 (7), 749-58. McGregor, R. and S. Bala (2002), "Asian Tigers Fear Last Supper Tbanks to Ravenous Gbina," Financial Times, (June 18). Mrema, E.L. (1987), "Strategic Planning in Tanzania," Long Range Planning, 20 (3), 105-10. Porter, M.E. (1980), Competitive Strategy. New York: Tbe Free Press. Roy, A., PG.P Walters, and S.T. Luk (2001), "Gbinese Puzzles and Paradoxes: Gonducting Business Researcb in Gbina," Journal of Business Research, 52 (2), 203-10. Samiee, S. and I. Jeong (1994), "Gross-Gultural Researcb in Advertising: An Assessment of Metbodologies," Journal of the Academy of Marketing Science, 22 (3), 205-17. Sekaran, Uma (1981), "Are U.S. Organizational Goncepts and Measures Transferable to Anotber Gulture? An Empirical Investigation," Academy of Management Review, 24 (April), 409-17. Sbenkar, O. (1994), "Tbe People's Republic of Gbina," International Studies in Management Organization, 24 (1-2), 9-34. Sbirk, S. (2002), "Opening Up Gbina," Financial Times, (May 14). Terry, E. (2002), "Eartb Moves But Slowly," South China Morning Post, (May 25). United Nations (2001), World Economic and Social Indicators 2001. New York: UN Publications.

106

Peter G.P. Walters and Saeed Samiee