Can U.S. companies beat China, let alone survive or thrive there?
Best Buy (NYSE:BBY) became the latest casualty to surrender to seeming Chinese superiority. It announced last week it was throwing in the towel, selling its Jiangsu Five Star Appliance division to local real estate outfit Jiayuan Group and largely exiting the Chinese market. In doing so, the electronics retailer joins a growing number of U.S. and multinational corporations that have similarly concluded they can't beat China at its own game.
Yahoo! (NASDAQ:YHOO), Revlon (NYSE:REV), Home Depot (NYSE:HD), and U.K. supermarket chain Tesco are just a few of the companies that slinked out of China after finding they could not compete effectively against local businesses.
I'll buy that
Yet it shouldn't be this way. The demographics of China's economy are a retailer's dream. Its cities are growing, income is rising, and the new wealth has created a Chinese middle class willing to spend more. In fact, the Chinese markets are geared more toward consumerism than at any time before.
The Economist reported China more than any other country contributed to growth in global consumption over the last two years and is "poised to become the next consumption superpower." China's $3.3 trillion in private consumption represents just 8% of the world's total, but is large enough to make it the second-largest global consumer-oriented society.
With more than a century of honing our consumerist skills, shouldn't U.S. business have easily marched in and taken over?
The great firewall
Sure, the Chinese government has thrown roadblocks in front of a number of Internet businesses, hampering their ability to compete. Facebook (NASDAQ: FB), Twitter (NYSE:TWTR), Google (NASDAQ: GOOG), and even Amazon.com (NASDAQ: AMZN) have all been blocked or banned at times.
But U.S. retailers generally haven't encountered such problems since Deng Xiaoping opened up the country to foreign investment 35 years or so ago. Some U.S. industries even perform quite well.
Fast-food dominates the landscape, with McDonald's (NYSE:MCD) operating some 2,000 restaurants in China that account for 10% of total company revenue, while Yum! Brands (NYSE:YUM) runs 4,400 KFC restaurants and 1,100 Pizza Hut locations. China represented half of its revenue and 40% of its operating profit last year.
Others have capitalized on local scandals to build their business. Memories of tainted milk that killed dozens of children and sickened thousands has Chinese mothers gladly paying inflated prices for dairy products from Abbott Laboratories (NYSE:ABT), Mead Johnson Nutrition (NYSE:MJN), and Nestle (NASDAQOTH:NSRGY) rather than buy from local suppliers.
Apple (NASDAQ: AAPL) generated 16% of its total revenue this fiscal year from China, where sales jumped 17% from 2013. That was faster than any other region and was ahead of the company's growth overall. And Ford (NYSE:F) is seeing the increase in Chinese car sales outpace auto industry growth as a whole.
Enter the dragon
Best Buy, though, couldn't get it right from the beginning. It entered China in 2006 with a small chain of branded stores and did nothing with them. After five years it had only opened nine Best Buy stores that were easily overwhelmed by leading Chinese chain Gome, which operates over 1,000 stores. Best Buy subsequently closed those locations in favor of a partnership with Jiangsu Five Star. Now it wants nothing to do with that investment, either.
Part of the problem is cultural. Best Buy operated its Chinese stores the way it does here, buying all its products from suppliers and distributors and selling them itself. Chinese consumer electronics retailers, on the other hand, tend to lease out space to suppliers and let their employees do the sales, something like a store-in-store boutique, but on a grander scale. Value-added services like delivery, installation and assembly, and maintenance are also often free in China, but Best Buy charged for them.
A new American century
The consumer electronic giant is not completely quitting China. It promises to keep a small presence through its private-label business that includes brands like Insignia and Rocketfish. But the announcement is recognition that breaking into this insular market is not easy.Still, U.S. businesses should have the competitive edge. Chinese consumers often seek out foreign name brands because they associate them with quality. Retailers that account for local sensibilities ought to be able to capitalize on that advantage and take a victory lap instead of waving the white flag of defeat.
Best Buy could not figure that out. Apple, McDonald's, and others have. There is no innate competitive superiority for Chinese companies. U.S. businesses just need to learn how to climb the wall of success there rather than simply believing that if they build it, Chinese consumers will come.
Follow Rich Duprey's coverage of all the most important news and developments in retail and consumer goods. He has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Apple, Facebook, Ford, Google (C shares), Home Depot, McDonald's, Twitter, and Yahoo. The Motley Fool owns shares of Amazon.com, Apple, Facebook, Ford, Google (C shares), Microsoft, Twitter, and Yahoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.