As we head into 2022, there are clearly headwinds and risks facing International brands operating in China. However, they are all navigable with the right strategies and the future remains bright.
It's hard to see these ending any time soon. Brands must be very thoughtful about doing anything that aligns them too closely with particular issues that could be flashpoints for the Chinese government, business partners or consumers and should only do so if fully prepared for the implications of such an alignment. The result can be dramatic. For values and beliefs an organisation believes this may well be a consequence they are happy to bear. A global fast fashion brand went almost totally "dark" on the China internet in Q2, 2021 after taking a very public stand regarding its China sourcing strategy. They were shut out of E-Comm platforms, Didi drivers could no longer find their stores on the navigation app, some landlords asked them to leave their premises or close the shops. The consumer response has been long-lasting. Recovery to it's pre-incident revenues will take a very long time and may not be achieved at all. Sporting Giants were also caught up in the same furore and also suffered revenue reversals.
Again, this may well be something the brand wants and needs to do but must do so with eyes wide open as to what may result. Stay politically hyper-sensitive and plan ahead. Know what you're getting into.
The rise (& rise) of local brands/"China Pride"
There was a time when being an "international' was almost enough in and of itself to propel it to success with the Chinese consumer. This is no longer the case. "China Pride" is a very real social phenomenon and is impacting Chinese consumer behaviour. It is not, as yet, leading to a negative feeling about non-Chinese brands but it is certainly creating a positive preference for home-grown brands. Also, buried deep in the CCP 5-Year Economic Plan is a section on how governmental policies will look to reduce the share of market for international brands operating in China. It stops short of detailing what this means but the intent is clear.
Chinese brands are laser -focused on their market and consumers and do not have pressure to have a "global" assortment in order to achieve product and marketing efficiencies, seek a global brand image or in any other way stretch a concept to be relevant but consistent across multiple markets with very different characteristics. Accordingly, their go-to-market is often more precisely calibrated to their market than a global brand can be.
So how to address these? A few key points can help:
Allow flexibility in the China GTM strategy to ensure local relevancy. This can be achieved with the right local inputs that are acted upon by wherever the GTM strategy is formulated.
Make sure the GTM has plenty of current, robust locally garnered insights - the team, key partners, research all play a part
Tailor some aspects of your seasonal plan precisely to local-specific events eg Chinese New Year, National Day, Singles Day etc
Work with local brands on product and marketing collaborations
Never, ever under-estimate the local competition - watch them closely and be prepared to learn from them
"Levelling down" economic policies
What I am referring to here is exemplified by the anti-trust action taken against an e-commerce giant, the crack down on excess debt in the property market, the regulatory clamp-down of private education and many, many other examples that happen at the national, regional, provincial levels where businesses that are deemed to be too powerful or not contributing to the well-being of Chinese society are the focus of rectifying actions and regulations.
There are a couple of very important aspects to this that need to be understood:
This is entirely consistent with Deng Xiao-Ping's economic thought whereby China is economically opened up, wealth is created in relatively small pockets of society before it is levelled down to achieve common prosperity.
It was very challenging operating in markets where major players can dictate (bully?) terms. Putting that right is viewed very positively by other, smaller players in those markets. Any short term pain is more than off-set by the expected medium- to long-term gains
A business operating in China, then, may need to moderate its growth expectations in the short-run whilst it plays out but, I believe, in time a healthier, more sustainable growth environment will be established.
Changing Hong Kong
Hong Kong has changed - there's no denying that whether one approves, disapproves or is somewhere in the middle, it has changed. From a commercial perspective there are two main areas a retail brand needs to adjust its perspective on HK:
HK used to be a window on China, Brands had to be there to gain credibility with the Chinese consumer and Chinese partners. This is simply not true at all anymore. Therefore, HK retail needs to pay for itself. Those steep losses brands used to tolerate in order to be "in HK" no longer make any sense. Landlords haven't quite cottoned onto that yet but market realities will be hard to buck over the long-run.
HK is no longer necessarily the best place, operationally, to run a China business. There are plenty of tax benefits but I am not referring to that here. Access to Chinese cities is much easier from Shanghai etc due to flights and trains being plentiful and, of course, no border checks. Teams are closer to the Chinese markets that matter if based in a Chinese city. There used to be a talent rationale too. That does not apply anymore either. You are as likely to find great talent in China as you are HK now.
Over time, HK is likely to be subsumed into China via the Greater Bay Area construct. But that is some years down the path probably. In the meantime shops and HQs in HK need to justify themselves in and of themselves. Those factors that were applicable and drove so many decisions to locate business in HK by default have passed.
A return to growth 2023 & beyond
I see 2022 as something of a "reset" year for China business. Xi Jin-Ping will be sworn in for his third term in Q3/4 2022 and I believe he will want that third term to be one of sustainable growth and "common prosperity". So far from being closed to international business it is my strong view that brands need to be in China now if they are to benefit from being part of that story over the next 10-15 years.