A Tale of Two Games: Global Strategies of Multinational Companies in China’s E-commerce Market

By Xin Wang & Justin Ren

Why has there been hardly any successful entry into China’s e-commerce market by western firms? From consumer-to-consumer markets to online retailing, the authors point out the common pitfalls of those firms entering China, and the unique challenges faced by multinational companies. Through re-thinking how to balance standardization and customization in global marketing strategies, the authors offer some practical advice that western companies can follow in order to meet the fast-changing needs of China’s online customers.

E-Commerce Giants Kept Out

China, the world’s largest e-commerce market. It boasts of the most internet users in the world (420 million, almost twice as the US), and, according to a recent BCG report, its online sales are expected to reach 2 trillion RMB (about $320 billion) by 2015. However, China’s e-commerce market has proven to be one of the toughest markets to crack:

• C2C market: Perhaps the biggest debacle is eBay in China. The well-known C2C player entered China in 2002 with an acquisition of the local firm eachnet.com, and subsequently spent $400 million on this venture. However, since Taobao, a domestic player, was founded in 2003, within a short five years, eBay lost its entire market share from more than 80% to 0.7%. Taobao now claims 90.3% of the market.
B2C market: Amazon.com, the world’s largest e-tailer entered China in 2004 by acquiring Joyo.com for $75 million. From the start, it faced fierce competition with Dangdang, and more recently with Tmall (owned by the same parent company of Taobao). Today, Amazon.cn is struggling to maintain its market share, which stands in the single digit, while Tmall controls 51.5% of the market.

Online travel: Similarly, Expedia.com, the largest online booking site, came to China in 2004 by buying eLong, a Chinese travel site founded in 1999. In the same year, another online travel company Ctrip.com was founded in Shanghai. Today, Ctrip.com’s market share is 46.3%, while eLong’s, a mere 4.9%.
Group Buying: The most recent fiasco was Groupon. The world’s number one online group purchase company had a hard time gaining traction in China from day one. Feeling the heat of competition from numerous local online coupon websites, Groupon had to sharply scale back its operations in China only months after its joint venture investment of $8.6 million in January 2011. Its market share now stands at about 2.5%.

China, the world’s largest e-commerce market. It boasts of the most internet users in the world (420 million, almost twice as the US), and, according to a recent BCG report, its online sales are expected to reach 2 trillion RMB (about $320 billion) by 2015.

Chinese consumers looked upon the well-known multinationals, and embraced the new business models wholeheartedly. However, something was “lost in translation” and the biggest consumer group in the world was turned away.

 

Rethink Global Strategies in China’s E-commerce Market


Compete in Two Games?


For multinationals, it is tempting to directly transplant the existing technology platforms, business models, and management to a foreign market. As a global company, a certain level of standardization is a must to ensure consistency in global image and achieve economy of scale. The key to success, however, lies in finding the right balance between standardization and customization. Knowing how to balance is crucial to any global company in order to achieve coordination across markets. However, there is no one-size-fits-all solution. The strategy is determined by industry characteristics, the company’s core values and competence.

The indigenous competitors do not play this game. Their goal is not to try to achieve a world-class stature or having a globally recognizable consistent brand name, or coordinate their business strategies in multiple countries. Their game is simple: to serve their local customers the best they can, a job that they almost always do better than a foreign company.

As a global company, a certain level of standardization is a must to ensure consistency in global image and achieve economy of scale. The key to success, however, lies in finding the right balance between standardization and customization.

The Name of the Game

Take the e-commerce market for example. To be successful, a company – global or local – needs to have the right blend of the “E-” (technology) and “Commerce” (business) to serve the target customers. The examples we saw earlier suggest that multinationals do not necessarily have the competitive advantage in technology or the business model.

To make matters worse, any competitive advantage in technology will dissipate more quickly in China. The industry is fast changing; and the Chinese domestic players are just as technology-savvy as their foreign counterparts. China has abundant human resources in the engineering and technology field. Each year more than 800,000 college students major in Computer Science, and they, combined with their intimate knowledge of local customers and business environment, will accelerate the change of technology.

Moreover, local companies have been more innovative in how they make money, disrupting the established business models adopted by foreign entrants. For example, EachNet initially followed eBay’s operating model and charged sellers for both listings and sales, which turned off Chinese sellers. Taobao, in contrast, offered largely free listing service. It makes money instead from seller-bid rankings in search results and its sale of user-defined storefronts. In fact, Taobao’s model proves to be so powerful that EachNet later decided to follow suit.

Chinese local companies have been more innovative in how they make money, disrupting the established business models adopted by foreign entrants.

Striking the Balance

So, if multinational e-commerce companies do not enjoy competitive advantage in technology or business model, what do they have to do to take foothold or succeed in China? And how do they maintain a consistent global image? The answer lies in how they balance their customization and standardization efforts.

 

Customization


Local Appeal: The look and feel of the website need to be customized to local customers’ taste; this should not be an area for standardization. EachNet’s website focuses on product offerings and prices, similar to eBay’s web page style in the U.S. Such an approach makes sense for Westerners who value convenience and simplicity in shopping, but it does not resonate well with Chinese customers. Taobao’s web page, in contrast, provides a much more dazzling array of information. It promotes a sense of social community by actively making product recommendations and shopping tips. Besides product listings, it publishes product reviews, fashion reports, and even entertainment news. Taobao makes shopping fun and keeps consumers coming back not just to purchase but also for information and entertainment. Moreover, products on Taobao are listed by popularity by default, a subtle but important difference from EachNet, which follows eBay and lists according to ending time, as Taobao understands that Chinese consumers are more likely to follow fashion trends in their shopping. These measures may not seem crucial on the surface, but in fact they are grounded in the understanding of the collectivistic culture of customers: they care a great deal about what other people think of what they wear and how they wear it.

Similarly, Expedia’s website in China, eLong, follows Expedia’s web design closely, almost identically; it is simple and geared toward easy search and online reservation. Keeping a simple design helps eLong maintain the consistency of its overall global brand image. However, it is not appreciated much by Chinese customers, who prefer a more “happening place” online, quite similar to their preference for brick-and-mortar bazaars and marketplaces. In response, Ctrip engages customers by providing much more detailed travel-related updates, a community area and discussion forum.

Chinese customers prefer a more “happening place” online, quite similar to their preference for brick-and-mortar bazaars and marketplaces.

Local Solutions: To ensure a smooth execution of their business models, local companies are much more aggressive in building their infrastructure and are more innovative in their operational details. For example, to overcome China’s immature credit and online banking system, which is critical in supporting online transactions, Taobao invented an escrow service called Alipay, which gave shoppers confidence in their online payment. To help its sellers thrive, Taobao even offers micro loans. EBay’s EachNet does not allow buyers and sellers to interact or bargain directly before or during their transaction, whereas Taobao allows for direct interactions between sellers and buyers at any time, which reduces the risks associated with fraud in online transactions for both sides.

Local Autonomy: Poor communication between the headquarters and field operations, and the slow speed at which decisions are made have been a constant struggle for many multinationals. On the day of the migration, traffic to eBay China dropped by half. But then-CEO Meg Whitman only heard about it one month later during a visit to China. It took the local company nine weeks to just change one word on the website, as everything had to go through headquarters. Very quickly, eBay saw their market share plummeting from 85% to just 30%. By the time eBay realized that it has lost 50% market share in such a short time frame, it was already too late. eBay is not alone facing this challenge; a similar struggle was reported for Amazon as well. Local management teams often feel their hands are tied even if they know how to adapt and react.

 

Standardization

Online shoppers seek convenience, affordability, fun, secure transaction, speed, variety and so on. These values are fairly universal across all cultures, and they are the reasons customers pay and come back. Multinationals usually have better knowledge and skills in customer intelligence, customer relationship management and better developed customer service training programs. Even though these areas are not directly visible in global marketing operations, they are vital in maintaining a consistent global brand image and reaching global coordination. For example, in early 2000, when Eric Kim spearheaded Samsung’s global marketing operations, much of the effort was devoted to “behind the scenes” efforts, such as spending eighteen months building a database that helped optimize marketing expenditures across markets, installing necessary organization structure and incentive programs such that product managers and country managers all shared and worked toward the corporate vision.

E-commerce companies need to realize that ultimately it is service that they sell. Service is intangible, unstorable, and heavily dependent on the delivery process. Delivering world-class customer experience consistently is the name of the game. Employee selection, training, and retention are a crucial part of service delivery. Multinationals can leverage their expertise and global stature to set new standards in the local market. Much can be learned from other global companies in the service industry, such as Four Seasons. On the surface, Four Seasons heavily customizes the hardware of their hotels to local taste. However, the company’s core value of providing consistently exceptional service transcends across markets. The Golden Rule, “one should treat others as one would want to be treated,” and its SERVICE standards (smile, eye recognition, voice, informed, clean, everyone) are upheld and reinforced everywhere they operate. Therefore, no matter which Four Seasons a traveller resides in, she knows exactly what she gets, even though each hotel’s look and feel may vary considerably. This is how standardization is achieved for service companies.

Global standardization means the careful selecting and training of employees, leveraging advanced business analytics and customer intelligence across the markets, installing the right organization structure and incentive programs, constantly communicating and cultivating the corporate culture and core values. Doing this consistently requires conviction and discipline, and it takes time. However, because it takes concerted efforts from all levels of the global company, it will lead to a defendable competitive advantage (Figure 1).

 

 

Looking Ahead…
Technology is just a means to an end. As Jack Ma, the founder of Alibaba (the parent company of Taobao) put it, he himself is no technology person, and his knowledge of computers is limited to sending and receiving emails and browsing the web.

To gain sustainable competitive advantages, companies should not rely only on an e-commerce platform, but should constantly innovate according to the needs of the local market, and focus on providing effective solutions to real problems.

Global companies need to realize that they are competing with local firms who know customers better, are equally tech savvy, and have far better access to the business and political network. To gain sustainable competitive advantages, companies should not rely only on an e-commerce platform, but should constantly innovate according to the needs of the local market, and focus on providing effective solutions to real problems. One of the greatest advantages of Taobao, for example, is its tight integration with its payment and escrow system as well as its local logistic system. Multinationals looking to enter foreign markets need to go beyond the technology itself and begin by identifying the areas they can provide long-lasting value.

Multinationals looking to enter foreign markets need to go beyond the technology itself and begin by identifying the areas they can provide long-lasting value.

Fast-changing local environments means that a long reporting chain with Western headquarters controlling everything is no longer suitable. Decisions have to be made quickly. When working with Chinese subsidiaries, headquarters should not seek total control, but allow enough autonomy in field operations. To achieve global standardization, the headquarters need to constantly cultivate corporate culture, make necessary organizational changes that align the interests of local managers with that of the headquarters, facilitate direct communication, and invest in human capital that delivers a superior shopping experience consistently worldwide.

To multinational e-commerce companies, their local competitors play a different game: their own. It is a tough battle to win. In the end, it all boils down to the value delivered, and how it is delivered. Striking that fine balance between customization and standardization not only will win the heart of local customers, but also promote consistency in brand image, which all global companies desire.

About the Authors

Xin Wang is Assistant Professor of Marketing at Brandeis International Business School. Her research interests include E-Commerce, consumer learning and service quality. Her research has been published in top-tier academic journals such as Marketing Science, Quantitative Marketing and Economics, Economic Journal, Marketing Letters and Journal of Retailing. Professor Wang’s prior professional experience includes working as an Assistant Professor of Marketing at Krannert School of Management, Purdue University, and as a research associate at the Wharton School, University of Pennsylvania. Professor Wang earned her Ph.D. and Master’s degrees in Marketing from Carnegie Mellon University.

Z. Justin Ren is Associate Professor of Business Administration and Dean’s Research Fellow in the Operations and Technology Management Department at Boston University School of Management, where he teaches operations management and business analytics. He is also a Research Affiliate at Massachusetts Institute of Technology (MIT) Sloan School of Management. His research has appeared in publications such as Sloan Management Review, Management Science, Operations Research and Medical Care. Professor Ren received his M.S. in Operations Research and Ph.D. in Operations and Information Management from The Wharton School at the University of Pennsylvania.