How international giants fell behind market explosion

The explosion of Chinese e-commerce has caught off guard not just domestic retail leaders but international industry giants. Initially, these Western giants attributed their losses to China's growth slowdown and the pullback by shoppers, which presumably accounted for their shrinking profit margins.

However, the rapid explosion of e-commerce and the rising share of consumption in the Chinese economy cast doubt over such interpretations. Most importantly, a closer look at retailing trends in China suggests that it is not Chinese consumers or Chinese economy that accounts for the losses of these international industry giants - but competition.

The famed Unilever, for instance, saw its sales fall off the cliff because it failed to go online fast enough. Chinese consumers did not leave the market; rather, they embraced Unilever's online competition. In June, Nestle SA, a leading Swiss food company, acknowledged it failed to understand how retail was changing in China. The failure to move quickly and broadly into online retailing proved costly: the Swiss company had to burn instant coffee it could not sell in stores. The same goes for Colgate-Palmolive and Germany's Beiersdorf, which have been suffering from offline overstocking, even as new online retailers have reaped enormous earnings.

Intriguingly, some of these international giants have missed much of the Chinese e-commerce explosion, even though many have experienced two decades of e-commerce growth in the U.S., Europe and Japan. In these advanced economies, the e-commerce explosion took place differently, however.

In the prosperous West, the Internet revolution initially relied on fixed-line personal computers and notebooks. In the emerging and developing East, such technologies remain relatively expensive. In these nations, the initial penetration has been fueled by mobility, particularly smartphones. In China, the mobile drives retail sales growth and currently accounts for half of all e-commerce sales.

The lessons are clear. First, business models that succeed in advanced economies may not work in emerging and developing economies. Second, advanced-economy lessons are vital but they must be adjusted to the Chinese business environment. Third, simple imitation of Western strategies does not ensure success in China - innovation may do so.

Dr Steinbock is Guest Fellow of Shanghai Institutes for International Studies (SIIS). He also has affiliations with think-tanks focusing on the United States, Europe and India. For more, see http://www.differencegroup.net/

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