The Chinese Market Is More Than Just Its Urban Centers

Multinationals are exiting China in record numbers — and much of this is due to geopolitical uncertainty. But not all failures can be blamed on politics; poor strategic choices are also to blame. Too many multinational companies start by targeting China’s rich urban markets. But as a few, such as chip manufacturer AMD, have discovered, along with many of China’s most successful homegrown companies like Pinduoduo, starting in China’s rural communities cities may be a better entry strategy.

Multinationals have begun exiting the Chinese market in record numbers, including LinkedIn and Carrefour after a respective eight and 24 years of operations. Many others, Walmart and McDonald’s among them, are selling big stakes in their Chinese operations and closing stores.

There are some obvious reasons for this, of course: the growing political and economic frictions between China’s superpower ambitions and the traditionally dominant Western capitalist democracies are increasing the risks of investing in China. We hear talk of the great decoupling everywhere these days.

But geopolitics aren’t the whole story. Western multinationals have been struggling with Chinese markets since before the current tensions. And some Western companies are still doing very well there despite those tensions. It’s perhaps worth considering the idea that in many cases the problem is not so much geopolitics as strategy.

Let’s look at a couple of contrasting examples.

Back in 2006, for example, electronics giant Best Buy began opening huge stores with expansive showrooms in China’s largest city centers, aiming to attract the country’s emerging consumer class at a time when China was rapidly developing its major urban centers in advance of the 2008 Olympics in Beijing and 2010 World Expo in Shanghai.

Sounds like a winning strategy, doesn’t it? But Best Buy suffered significant losses, and its market share in China stalled at a meager 1.8%. After losing tens of millions of dollars in only a few years, Best Buy decided to exit the Chinese market in 2011.

Semiconductor manufacturer AMD’s more recent record stands in sharp contrast. By 2020, China was the company’s largest market, contributing $2.3 billion in sales. AMD has taken market share from Intel and has fostered tens of millions of enthusiasts for its products, to the extent that it is even opening specialized stores for its growing legion of “fans”. AMD’s success has forced Intel to respond with a similar strategy, developing low-end processors and phones for the rural market.

A key difference between these two examples was not geopolitics but their choice of market-entry strategy. Best Buy chose to concentrate on China’s wealthier but hotly contested urban centers. When AMD entered China in 2004, it focused on selling cheaper products to attract price-sensitive consumers in rural markets. In this way, it could avoid competing with Intel, then the market leader. And as AMD’s senior executive in China, Pan Xiaoming, noted, even if only 10% of the 200 million households in the countryside wanted to buy a PC, that that would result in 20 million sales of PCs, along with the chips that went in them. AMD also participated in a government program called the “Appliances go to the countryside” which spurred its sales in these locations further.

Consciously or not, in entering China through the rural market, AMD was copying a strategy that was behind the success of many of China’s current champions. Pinduoduo, the largest interactive e-commerce platform in China, founded in 2015, is a case in point. Founder Huang Zheng initially focused on serving China’s less affluent cities or villages, thereby avoiding competition from the likes of Alibaba and The company attracted low-income consumers by focusing on cheap prices, and thus gained traction in a segment numbering hundreds of millions of customers. After gaining brand reputation, it moved to urban areas and later conquered the whole nation. The company now even has more active users in China than Alibaba and JD.

Huawei, now a gigantic telecommunications provider, also got started in the countryside. When the company was a young firm selling network switches in the early 1990s, it faced tough competition from the incumbent multinationals Alcatel, Lucent, and Nortel Networks. Founder Ren Zhengfei understood that Huawei would not have a chance against those giants, and to avoid them, Ren targeted market niches that were low income and difficult to access. His salesforce went from village to village. After succeeding in occupying China’s rural market, Huawei moved to bigger cities, and finally the entire country. By 1993, Huawei had come to dominate its market in China and is today one of the largest telecom companies in the world.

Ironically, the strategy behind these successes also features in the playbook of Mao Zedong, the founding father of Chinese communism and an arch enemy of Western capitalism. As a young military commander in the 1920s, Mao realized early on that the traditional Marxist-Leninist revolutionary strategies of mobilizing factory workers in cities to seize political power would not work in China. With an overwhelmingly rural economy, the country had too little industry and too few factory workers. So despite the disapproval of its Soviet brothers-in-arms, the Chinese Communist party under Mao built first its brand with China’s peasants and farmers, turning them into the party’s soldiers, before attempting a move into the cities.

Not a bad entry strategy for the CCP, as it turned out. And it obviously worked for AMD.

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