Western Companies Like Apple And Land Rover Are Learning How Not To Do Business In China


The allure of the Chinese market has powered hopes for U.S. companies and their stocks for some time.  According to U.N. estimates China’s population stands at 1.42 billion now, and with a growing middle class, that calculus seems to add to an easy win for Western consumer giants.  With so many consumers it should be easy to gain a market foothold, and as volume is a key driver of profitability for any industry with any degree of costs that are fixed, selling into China should be accretive to shareholder returns, as well.

The only problem is…it’s not happening very often.  I will refrain from presenting any political opinions on the “Trade War” between the U.S. and China and the Trump and Xi administrations.  I believe it is the height of inanity that Wall Street has been pushing stocks up/down based on “feelings” about prospects for a U.S.-China trade deal.  I know hundreds of people–or according to my LinkedIn network, thousands–employed in the world of finance, and not a single one is an expert on politics.  So, as a general rule, I try to comment only on topics about which I am knowledgeable.

China’s impact on the financials of Western companies is one of those topics.  The most recent quarterly earnings season has given analysts plenty of examples of U.S. and European companies that are struggling in the Chinese markets.  To be fair, there have been a few success stories and Nike jumps to mind after posting a 26% rise in revenues from its Greater China region in its quarter ended November 30th.  More importantly, Nike posted a 48% jump in profits from that region in the quarter. We’ll see if that strength continues in Nike’s February quarter.

Shanghai skyline at night, ChinaGetty

Other companies, obviously, face an impossibility of achieving penetration in China as they are blocked from doing so by the Chinese government.  Alphabet’s Google, Facebook and Netflix are all blocked in China and Amazon does not control its local amazon.cn domain. Yes, there are workarounds to that ban, and if you are Chinese national reading this column via a Virtual Private Network, I offer you a sincere xie xie.  Again, though, the mass of consumers in China is enormous and disposable income is rising, so there should be opportunity there.  As always, execution is key. Here are three examples of poor China strategies and their impacts on Western companies.

Don’t push developed market price points onto developing country consumers.  This morning’s report by IDC of a 19.9% decline in iPhone sales in China in December was shocking.  After Apple’s profit warning in early January and CEO Tim Cook’s apportion of “more than 100%” of the blame to China, we knew the Chinese market was bad for Apple, but not that bad.  The iPhone simply costs too much to sell well in China, as noted in this article by China Daily’s excellent business columnist William Hennelly (in which I am quoted.)  The current iPhone is an enormously powerful tool, but that power raises the cost to build, not just the retail price.  Apple cut prices of the iPhone 8 and XR  by up to 20% in January, but I am not convinced that is the solution to their problems.  According to IDC Huawei’s shipments jumped 23.3% in December, and Huawei does not have the embedded marketing costs and need to constantly innovate to please Western consumers as Apple does.  

Don’t take a successful Western brand and assume it will translate to the Chinese market. Last week brought a dreadful earnings report from Tata Motors, including a loss at the EBIT level and an asset write-down totaling 3.1 billion euros. Tata management blamed its earnings miss on declining unit sales for its Jaguar Land Rover unit in China.  JLR sales in China declined 21.6% for 2018 with an astounding 42.4% drop in December. These figures are obviously magnitudes larger than the declines registered in the overall Chinese vehicle market, and it shows the weakness of Range Rover. I have followed the car industry for 26 years and I have learned through experience that when industry sales dive the weaker brands–which invariably have weaker distribution systems than the leaders–get hit the most.  

Don’t go it alone; local partnerships are key.  Volkswagen and GM have spent more than 20 years and tens of billions of dollars each building both production and distribution networks in China.  That has paid off in more sustainable delivery patterns. Only recently has China allowed car companies to produce locally without a local partner (Tesla’s new Shanghai facility will be an example of this,) but GM and VW’s success shows that may not be necessary.  Of course Elon Musk is proud of his technology, but with all the fears of theft of IP (intellectual property) that come with working with Chinese partners, I don’t see the downside for the Wolfsburg and Detroit giants. Are there a passel of lower-priced imitators of the Golf tooling down the roads in Frankfurt?  No. Are there a bunch of Chinese-made GM-inspired SUVs tooling down the roads of Hamtramck? No, Chinese brands have made almost zero penetration in the U.S. or European auto industries, and imports of completed vehicles from China represent not even 1% of the overall US. vehicle market.

So, Apple needs to figure out how to hit Chinese price points, Tata needs to figure out whether Jaguar and Land Rover will ever have critical mass among Chinese car buyers–Elon should be asking himself that question about Tesla, too–and GM, VW and Nike merely need to “keep on keepin’ on” in China.

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