Dr. Stephane J. Grand

1. The Chinese as Businesspeople and Consumers Dr. Stephane J. Grand

2. Business with the Chinese • As Businesspeople: • What is in their heads, how they see the world. • How they see their commitments and yours. • As Consumers: • How they choose. • What you need to know to market products to them.

3. Power relations in China • Agrarian society, family based • Extended family, power is concentrated but distributed

4. Power Relations in China • Power relations in Chinese society and government breed: • Collectivism, uniformity and lack of critical thinking • Reciprocity, gifts and corruption. Or the triumph of egoism on collectivism. Opposition between Kantian system in the West, where a third party cannot be used (“end not means”) to the Chinese system, where every action is an entry in the “relational balance-sheet” between two individuals or groups. • Bao or the Ethical Particularism (ethical obligations apply differently according to level of relationship) • Positive freedoms – As a rule, everything is forbidden • Societal rigidity and legal flexibility

5. Power relations in the company • Unlimited and undisputed power of the boss • … at every level • Unchecked use of company resources (both human and material) • Bosses of all levels create their networks : Nepotism • Maintenance of networks: Feudalism and reciprocity • Solidity of the networks: Racism and exclusion • Not relations of authority>> relations of power – remember this when mapping a Chinese counterpart

6. The Inscrutable Chinese:Abstractions and Truth in China • What makes the Chinese inscrutable to the Westerner? • Implicitness and lack of abstract thinking • Agrarian civilization: • Peasant thinking is centered on the immediate (hence no development of epistemology). • Life based on the cycle of seasons and sufficient food supply. • Development of the esthetic continuum, and loss of demarcation between subject and object. • Written language based on characters • Link between image and a continuum of meaning. • No semantic precision • Development of science based on images and “stories”, not on equations • No abstract truth, but appropriateness of statements: appearance is everything

7. The Inscrutable Chinese:Abstraction and Truth in the West • How Westerners think • Explicitness and articulated logic in the West • Mercantile civilization based on the Greek City-State: • Merchant thinking centered on figures. • Life based on exchange (prices, proportions). • Development of thought around discrete semantic units and combinations. • Development of alphabetical languages, and therefore of abstract thinking. • Development of a concept of abstract truth central to Western philosophies

8. Abstraction and Truth:Impact on your business • Opposition between fuzzy logic in the Chinese world and articulated logic in the West: The Chinese make connections and find explanations beyond the visible spectrum of Western logic. • Impact: • Westerners and Chinese do not talk about the same things. Appearances are deceiving. • The Westerner is confused and feels cheated. • The Chinese does not understand the coldness and “lack of human sentiment” of the foreigner. • Agreements are made on the basis of this misunderstanding. • Social relations and fuzzy concepts supersede everything Western business stands for. A Chinese will protect his guanxi first.

9. Guanxi and Contract • Who needs a contract? • Guanxi is stronger than contracts, and more enforceable.

10. Contracts in a Court of Law • The state of the judiciary: • Generally undertrained judges selected for their loyalty to the system. • Outside of outright bribery, local party pays taxes locally. • Guanxi, equitable decisions and fuzzy reality: • The judges usually make decisions they believe to be fair, that is, to respect the prevalent equilibrium of the relation. • When in doubt a judge or arbiter will look for an intermediate solution. • Judges do not feel constrained by the private agreements they have to decide upon, and requalify business relations.

11. Dealing with the Chinese Businessman • He is a social animal, more so than you. But you are not in his society. Focus on realistic and controllable material conditions for your transactions. • He lives in a world of fuzzy reality, where things change without remorse, and rules are here to be bent when needed. Check often you are talking about the same thing. • Contracts are seldom respected when inconvenient and rarely enforceable in court. Focus on the power equilibrium in the transaction. Think preemptive.

12. CHINA’S CONSUMER

13. VALUE FOR MONEY CHINA’S CONSUMER MARKET BRAND SHOPPING EFFICIENCY TOP FACTORS THAT DRIVE A PURCHASE IN CHINA QUALITY OTHERS COST

14. Department stores become less popular • New purchasing channel: • Internet • Convenience stores • Hypermarkets, shopping centers and warehouse-style supermarkets DISTRIBUTION PATTERNS

15. Consumers maintain their local preferences and tastes. • This segment may be found in the most remote rural areas of central and western China. CHINA’S CONSUMER MARKET • Consumers display a mix of global and local preference. • This segment is a collection of “mega-cities” like Fuzhou, Zibo, Quingdao, Hantou, Dilian, and Huizhou. • Chinese consumers display similar preferences and tastes with consumers of highly developed countries. • This segment extends over three eastern regions: The Pearl River Delta, which includes Hong Kong, Guangzhou and Shenzhen; the Yangtze River Delta, which includes Shanghai and nearby cities; and the Beijing-Tianjin region.

16. REAL PROBLEM FOR OVERSEA’S MARKETER IN THE CHINESE CONSUMER MARKET CHINA’S CONSUMER MARKET • So far, overseas marketers have reached for the easy target, the highly globalized segment, which requires little localization of the products sold in their home market. • The trouble with the highly globalized market segment is that it’s getting crowded with both overseas and domestic players. Yum! Brands (NYSE:YUM) has designed Pizza Hut and KFC menus that include both a global and a local component. Pizzas catering to the Chinese market, for instance, are made of a thin crust and are light on cheese, while pizzas made for Western markets are made of thick crust and plenty of cheese. McDonald’s has maintained most of its menu intact Coca-Cola has substituted English characters with Chinese characters on its traditional package.

17. The Chinese Consumer THE THREE RULES OF SUCCESSFUL BRANDS • Products displayed or consumed in public command huge price premiums compared to those used in private. • The average middle-class Chinese spends USD 15,000 to fit out a bare 100 sqm apartment worth USD 1 M • The leading brands of mobile phone are foreign and expensive but the leading household appliances are cheap and local • Benefit should be external as opposed to internal. • Baby formula makes kids smart, not happy • A car is a statement, not enjoyment • The products must navigate the crosscurrents of ambition and regimentation, allowing to blend in, while standing out. • Tom Doctoroff, Wall Street Journal, May 18, 2012.

18. CHINA AND THE INTERNET CHINESE SHOPPERS SET TO BECOME WORLD LEADERS ONLINE A woman shops for wine online in China. Photo: AFP

19. CHINA AND THE INTERNET THINGS TO KNOW ABOUT CHINA’S ECOMMERCE MARKET • “China is expected to become the world's largest consumer market in 2015.”- China's Commerce Minister Chen Deming • China’s e-commerce market has grown at an average rate of 71 per cent from 2009 to 2012, versus 13 per cent in America, and its total size is expected to reach 3.3 trillion RMB by 2015: A report from Bain and Company • Total spending by Chinese consumers on online shopping reached US$212.4 billion last year, compared to US$228.7 billion in the US: A report from Bain and Company • “Whether you’re an online player or an offline player, you need to have a meaningful, credible presence on the web.” • Online spending could account for half of all Chinese retail spending within a decade. -Chinese e-commerce firm Alibaba Group.

20. THINGS TO KNOW ABOUT CHINA’S ECOMMERCE MARKET CHINA AND THE INTERNET

21. 3 HABITS THAT SET CHINESE ONLINE SHOPPERS APART FROM WESTERNERS CHINA AND THE INTERNET On Sale

22. 3 HABITS THAT SET CHINESE ONLINE SHOPPERS APART FROM WESTERNERS CHINA AND THE INTERNET Better Price Primary reason for shopping online: Western consumers Vs. Chinese consumer Convenience Good value Sale Discount According to a study from the Multimedia Research Group, 60% of Chinese online consumers list “better price” as the number one reason to make purchases online.

23. 3 HABITS THAT SET CHINESE ONLINE SHOPPERS APART FROM WESTERNERS Accessibility CHINA AND THE INTERNET • Accessibility to more products • High preference for comprehensive, even overwhelming, online presentation style, while in Western countries it is better to keep the website clean and simple • Detailed photos with a multi-angle display and informative description of products is extremely important for Chinese online shoppers. This can effectively mitigate their concern about product quality

24. 3 HABITS THAT SET CHINESE ONLINE SHOPPERS APART FROM WESTERNERS CHINA AND THE INTERNET GAP- Chinese store website GAP- US store website

25. 3 HABITS THAT SET CHINESE ONLINE SHOPPERS APART FROM WESTERNERS • In China, third-party payment and cash-on-delivery is commonly adopted while Westerners use credit cards all of the time. • Cash-on-delivery Offers effective solution which lets online consumers feel more secure and comfortable and thus make their purchase decision easier and faster PAYMENT METHOD CHINA AND THE INTERNET

26. 3 HABITS THAT SET CHINESE ONLINE SHOPPERS APART FROM WESTERNERS PAYMENT METHOD CHINA AND THE INTERNET Third-party payment services such as Alipay provide a perfect solution for online shopper safety given that poor quality and fraud is the major concern for Chinese consumers who shop online. The recently extremely popular “fast pay” (快捷支付) function of third party payment even allows users to fulfil payment by simply having a cell phone and a card number.

27. SUMMARY CHINA’S CONSUMER MARKET • E-commerce certainly is one of the biggest growth opportunities and it draws in well with the evolution of consumer behaviour—“seeking good value for money and efficient shopping.” It is also a cost-efficient way to roll out new products and concepts, especially through an interactive platform. • Identify and understand the three aspects (better price, accessibility and payment methods) can provide basic guidance for shaping an excellent customer experience online in China. • Western firms should take the time to identify a trusted partner who understands the intricacies of the Chinese ecommerce landscape. • For new brands entering China, don’t just assume that China has an immense consumer base, so let’s take a simplified business approach. Offer new and variety of options to the consumers and you may have a chance to succeed.

28. A SUCCESS STORY IN CHINA HOW TO EXPAND AND BECOME PROFITABLE IN CHINA ?

29. Key periods IKEA currently became the LARGEST FOREIGN COMMERCIAL LANDOWNER IN CHINA, with 12 stores covering a total of 640,000 square meters. It saw more than 15 million visitors.

30. Key points • IKEA focused on good understanding of the market • By visiting hundred of Chinese homes to LEARN PEOPLE’S HABITS and analyse needs. • By being more locally relevant to people, the company prepare DIFFERENT LAYOUT IN STORES to present its 9000 articles indeed. • IKEA oriented its pricing strategy • By aiming at providing relevant and AFFORDABLE SOLUTIONS with quality products at lower prices (Prices fallen 50% in the past decade) • By building number of factories in China to RESOLVE THE PROBLEM OF HIGH IMPORT TAXES and rax mateial costs (cutting prices by more than 60%).

31. Key points • IKEA categorized its target market and controlled its brand image • By targeting young MIDDLE-CLASS POPULATION with higher incomes. • By handling the Chinese shopping behavior in their stores (making themselves at home etc.), IKEA invest for a long-term strategy. • The company analyzed peripheries before settling in • By considering CONVENIENT TRANSPORTATION as a major factor in selecting new sites to attract people easier and lower the goods transportation costs • By implanting their stores with concern about PERIPHERAL FACILITIES such as parking spaces, large shopping areas and entertainment nearby

32. How IKEA strategies differ in Europe and China

33. How IKEA strategies differ in Europe and China

34. How IKEA strategies differ in Europe and China EUROPECHINA Good quality, furniture stylished and prices very low, for all kind of population Good quality, western-styled aspirational brand which is for middle-class population PRODUCT : changes to suit local market STORE : next to public transport PRICE : affordable prices PROMOTION : ads on Chinese social media and blogs LOGISTICS : products are sourced locally PRODUCT : stylish and functional products STORE : stores next to highways, access by car PRICE : low-cost PROMOTION : IKEA catalogue is the main marketing tool LOGISTICS : products made in developing nations

35. IKEA vs Home Depot “Shopping in China is far more about the experience itself than it is in the West” Tom Doctoroff, expert on Chinese consumer psychology Home Depot entered the market in 2006 and closed 5 stores since. ? Why Home Depot is struggling when IKEA is thriving in China

36. IKEA vs Home Depot What Home Depot didn’t understand and IKEA did :

37. The Chinese as Businesspeople and Consumers Q&A Dr. Stephane J. Grand