When in China ... Foreign Companies Should Devise a Localization Strategy That's Based on a Thorough Understanding of the Complex Chinese Business Culture

By Li, Mingsheng | Communication World, November-December 2008 | Go to article overview

When in China ... Foreign Companies Should Devise a Localization Strategy That's Based on a Thorough Understanding of the Complex Chinese Business Culture


Li, Mingsheng, Communication World


According to China's State Administration for Industry and Commerce, by the end of 2007, a total of 286,200 foreign firms had been registered to do business in the country, as joint ventures and wholly foreign-owned ventures, for a total of US$2.11 trillion in foreign investment since the economic reforms of 1978. By the end of July 2008, the top five foreign investors came from Hong Kong, South Korea, Taiwan, the U.S. and the European Union.

Most multinational companies, attracted by Chinas huge consumer market and relatively cheap labor, have made significant profits from their investments. At the same time, foreign direct investment has invigorated the Chinese economy and improved the quality of life for Chinas citizens.

However, cultural challenges prevent some investors from reaping the expected rewards. Cultural barriers occur when foreign firms transplant their business models directly into the Chinese cultural milieu, unaware that in transferring these business models, they are also transferring their cultural values and beliefs. A direct transfer of Western business models can put foreign firms at risk. On the other hand, if companies adopt local business practices, such as guanxi (relational communication networks), without fully understanding them, they can also suffer.

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Most foreign companies in China use a localization strategy that takes into account cultural differences and fosters a new blended corporate culture. An effective localization strategy requires cultural sensitivity and a willingness to adjust products, services and management styles to meet local needs. The new corporate culture considers compatible strategies, objectives, trust building, management, and international business standards and ethics.

Localization strategy

The degree of localization largely determines the degree to which a business succeeds or Fails in China. The more the company works toward localization, the more likely it will be successful. And yet localization strategies themselves need to be carefully worked out in order to succeed.

The KFC and McDonald's fast food chains are good examples of companies that are succeeding with their localization strategies. Both have made attempts to understand Chinese culture and traditions and respect Chinese tastes. When managers realized that their Chinese customers were complaining that the food was not as good as their local cuisine, they introduced Chinese items to the menus; for example, KFC added preserved Sichuan pickle, shredded pork soup, mushroom rice, traditional Beijing chicken roll and Uygur barbecue spices. They also employed Chinese managers, adopted Chinese marketing strategies, established guanxi with local authorities, made donations to help the May 2008 Sichuan quake victims and promoted their products through Chinese-language web sites.

The experiences of two automakers--German Volkswagen and French Peugeot--provide useful insights as well. Both companies established their joint ventures in China in 1985 with strong support from their respective governments. However, different business and management strategies led to different outcomes: VW has become one of the largest foreign carmakers in China, claiming 24.6 percent of sales in 2007 in the Chinese market. Peugeot failed and had to sell its production facilities to Honda in 1999.

VW's success lies in its market and nonmarket strategies, its amicable relationship with Chinese officials, its fast delivery of products and services through its extensive networks throughout China, its use of local management, and its quick response to challenges with strong local manufacturing and distribution networks. Peugeot, on the other hand, used designs, processes, components and management approaches developed in France. It developed only narrow networks in a few big cities in China, and depended mo much on French expatriate managers, distrusting Chinese management talent and local component suppliers. …

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