Ep. 81: What It Takes to Win in China

Episode 81 of Tech Buzz China continues our series of audio experiments, and features co-host Rui Ma in conversation with Wharton professor Karl Ulrich on his latest book, Winning in China. Co-authored with Wharton Global Fellow Lele Sang, it presents eight carefully researched case studies of business successes and failures, from Amazon to Sequoia Capital. The episode is a recording of a conversation that was broadcast live on the Clubhouse app on February 1.

As Tech Buzz continues to broaden our content formats, you can follow us at techbuzzchina.com, subscribe to our YouTube channel, join us in the Inside Asia group on Clubhouse, tweet at us at @techbuzzchina, and write to us at [email protected] and [email protected]. As always, our transcripts are available on our website, as well as at pandaily.com.

If you are a Tech Buzz listener and would like a free copy of Karl and Lele’s book, please email us at [email protected].

Thank you to our teams at SupChina and Pandaily, and especially to Bryce Ye, Kaiser Kuo, and Jason MacRonald. If you enjoy our work, please leave us an iTunes review! They do matter and we appreciate it so much!


[00:00] Hey, everyone. Sorry for the long absence. You might think we’ve been on vacation, but actually, we have been working really hard on a slew of new projects. First and foremost, I’m pleased to announce that we are alpha testing a new paid community for serious investors in China tech called Tech Buzz China Insider. So, if you’re into really deep dives, like, what does the supply chain behind community group buying actually look like? What is the exact difference between how Pinduoduo 拼多多 and Meituan 美团 are executing on it? Why are they each adopting the different strategies that they are? Then email us at [email protected] with your background and why you want to join.

[00:44] In addition, we are experimenting with new forms of audio. Many of you have told us that you love our audio essay type format, but you also want to hear some more casual conversations we have with other experts. So that’s exactly what we’re doing. We’re calling them Tech Buzz China Live Cast. Today’s episode is one such experiment. We’ve actually recorded several others already. There’s one with product manager Dan Grover on WeChat 8.0, one on cyber security and one on the creator economy in China. You can even join some of these conversations live on the clubhouse app, join our real time Q&A, and follow RUIMA on clubhouse to get alerted to all the events we do.

[01:50] Hi everyone! We are Tech Buzz China by Pandaily, powered by the Sinica Podcast Network by SupChina! We are a biweekly podcast focused on giving you a peek into what’s buzzing within the tech community in China. We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. So you can be smarter about the world of China tech.

I’m your host today, Rui Ma. If you enjoyed our show, please review us on Apple Podcasts, or wherever you get your podcasts. We really appreciate it. Now, for a special edition of Tech Buzz China, a live cast with Karl Ulrich.

[02:37] Hi, everyone. Welcome. I want to introduce my friend and speaker, Professor Karl Ulrich, who is Vice Dean of Entrepreneurship and Innovation and the CIBC Professor of Entrepreneurship and e-Commerce at the Wharton School of the University of Pennsylvania. He also holds an appointment as Professor of Mechanical Engineering, and he researches innovation, entrepreneurship, and product development.

He’s written many books. Today we will be talking about his latest one, which was just released last week called Winning in China. He’s also written a couple of other books, including Product Design and Development, which is a textbook, as well as Innovation Tournaments that was published by the Harvard Business Press.

In addition to his academic work, I just want to emphasize that Karl is not one of those people that only spent their time in academia. He’s actually an entrepreneur himself. He’s led dozens of innovation efforts for medical devices, tools, all sorts of products. He holds more than 20 patents. He’s actually the founder of Terrapass, which the New York Times identified as one of the most noteworthy ideas of 2005. And if you guys are into scooters, he’s also a designer of the Xootr scooter, which Business Week recognized as one of the 50 coolest products of the 21st Century. I hope I pronounce that correctly. So really big deal. Karl holds bachelor’s, master’s, and doctoral degrees in mechanical engineering from MIT. Like I said, today’s topic is what it takes to win in China: a look at successes and failures, and we’re really talking about Karl’s most recent book just called Winning in China.

[04:11] So I was very lucky to be able to proofread the book and I knew it’s gonna be really good because I have a really high opinion of Karl, because so many of the examples were on tech. I was still really surprised about how many of those case studies I was actually unfamiliar with, even though I was living in China and working in the industry when these companies were expanding and when these cases studies were unfolding. But I just didn’t know what actually was going on.

And a lot of the assumptions I made about why these companies succeeded or failed, actually weren’t true. So, I’m really happy to be introducing Karl to talk about these case studies a little bit more in detail. The first question I wanted to ask you is: how did you come up with the idea of the book and specifically, why did you pick these eight case studies? And could you tell us what they are actually for us in the room who don’t have the table of contents in front of us?

[05:06] Sure. Well, Rui, first, it’s a huge pleasure to be here. I’m a big fan of Tech Buzz China. I listen to every episode. So, it’s real that I’m really honored to be on the show. First, I should say that the book is co-authored with Lele Sang who is a research fellow at the Wharton School. And the idea actually originated with a conversation I had with Lele. Lele came in my office at Wharton, San Francisco, and she said, Karl … She was an alumna of Penn. She came by and said, “Hey, I graduated from Penn and I want to write a book. And my plan is to write a book about U.S. tech company failures in China.” I said, “Well, that sounds like a real downer. And we also don’t really just support people to write books. You’re at Wharton.” But then she left and I got to thinking about it. And I said, “Well, okay, but what if the scope were broadened to be beyond tech and beyond U.S., and looked at successes and failures, that would be a book that would have a broader audience, and would be more interesting, and would be a little more upbeat.” I went back to Lele and I said, “Hey, why don’t we work on this together? And why don’t we broaden it? And why don’t we make it about successes and failures?”

So, to answer your second question, Rui, what the book has is basically eight deep case studies. In most cases, they’re the first time anyone’s written an in-depth case study of the company’s experiences in China. And then we have this book ends with a framework at the beginning, and then some prescriptions at the end. And the eight companies are Amazon, Norwegian Cruise Line, Hyundai, and LinkedIn. Those are the first four. And I should say the first two are unquestionably failures, Amazon, and NCL. And then Hyundai … Sorry, it is a two-part story which we can get into if you want. And then LinkedIn is …. The jury’s still out. They have not yet succeeded. And then the four successes are Sequoia Capital, InMobi, which is an Indian ad tech company, Intel, and Zegna, the Italian fashion brand.

[07:14] So I want to start off with I think, the elephant in the room, which is Amazon. When I first moved to China, Amazon was alive and … Well, for a while it really looked like they were going to really take over the market because they started going to China in 2004, which is still pretty early. And they bought one of the leading local domestic players called Joyo. You know, Jeff Bezos is obviously a famously long-term thinker. And it just looked like they were really investing hard in the country, hiring a lot of talent, including many of my friends. But ultimately, they didn’t really work out. It actually admitted … In 2019, they announced that they were going to shut down their Chinese marketplace business and shift their focus to offering mainland consumers overseas products rather than goods from local parlors, which is, if we all know, Amazon’s business model. You know, the marketplaces are a huge part of their business. So that was a really big blow and everyone saw that as a retreat of the company from China. What do you have to say about Amazon? Why did they not work out?

[08:19] Yeah, it’s a fascinating story. As with all of these stories, there’s like a bunch of factors. But let me just take on a few of them. The first is that Amazon very much has a philosophy of one best way: there’s one best way to do things. And we figured it out. And they’re a little bit I would say, a little bit arrogant that way, but often quite right. And in fact, one of the key principles of Amazon is leaders are frequently right or right most of the time or something like that. And they bring a certain arrogance that we figure this out, and we know how to do things. And they brought that model to China. And they were very reluctant to localize at all, including things like aggressive pricing. And so that’s the first factor. And that would be fine if they were entering the Italian market, where there was no local rival that could compete really, or could recreate the tech that Amazon had.

But when you go into China, you’re up against the local competitors, who, if they win just their local market … That is if they become the leaders in China, they’re billionaires, they’re wildly successful, and that becomes their single-minded focus. And so that’s what you’re up against. And they were up against competitors, JD and Alibaba and others who were willing to lose hundreds of millions of dollars to win the Chinese prize. And Amazon didn’t bring enough in terms of its distinctive capabilities to overcome the fact that it was intrinsically less nimble and less agile than those local competitors. So that was the main factor. But there’s another really interesting aspect to the Amazon story, which is that Amazon had opportunity cost. So, if you actually look at the last five years, Amazon’s return on capital has just crushed that of JD, or Alibaba. Their stock is up 600% in the last five years. They had amazing opportunities globally. And with a scarcity of managerial talent, and some restrictions on capital, any company has to make a decision of am I willing to lose hundreds of millions of dollars a year for some possible eventual prize here in China? Or should I be trying to go out and win India or win Europe or win Latin America? And Amazon decided that their capital was better put elsewhere.

[10:36] I don’t know if there was also a Wharton case study that I wasn’t aware of that … Or it’s not a case study. It’s one example that you cited as part of the Amazon case about providing customer chat, right? I thought that was really interesting to contrast what they did there with Alibaba.

[10:50] Yeah, well, I guess it’s a nice example of lack of localization, Amazon takes the strategy that we’re gonna really build a great user experience, we’re going to really understand user behavior when lots of it being testing, and then we’re never going to let you interact with a human. And the Chinese consumer expects a little more coddling and the cost of customer service in China is much lower than it is in the rest of the world. So, its competitors were willing to build features that perhaps were a little more labor-intensive, but that better met the needs of the Chinese consumer. And Amazon was just not willing to do that.

[11:25] Yeah. And you see that even today, I think very few people realize how much of e-commerce is still powered with people and people interaction. They’re, like, Pinduoduo 拼多多, you know, like, basically all the brands, even the luxury brands have WeChat groups where you join and there is like a person promoting stuff and selling stuff to you. And you get this idea that, you know, you’re in a group, a community of buyers, and everyone is interested in this brand. We’re interested in what this person has to sell. It’s very people-intensive and highly manual, in a sense, even today in 2021. Well, let’s go on to another case study. So I think Amazon’s a little bit of a downer. Like you said, they made maybe a very rational choice to invest in other markets and not put so much time into China when there’s a lot of local players willing to lose a lot more money than they were able to.

Let’s contrast that with a successful case study InMobi. So I actually had quite a few friends who were working in InMobi. And I had like a vague idea of what they were doing, which was digital advertising. I didn’t actually know they were an Indian company. And I was definitely not aware of how successful they were. I mean, I kind of got that idea because there were sponsors of a lot of tech events in Beijing. Could you tell me or tell the audience more about InMobi? And their, I guess, like, pretty incredible success?

[12:46] Well, the first thing is that InMobi is a fascinating story. And I would say 75% of it is a story of the CEO Jessie Yang. This is its China CEO, Jessie Yang. So yes, Indian company, but the founder was an Harvard Business School grad. And Jessie Yang was a MIT Sloan MBA, working at McKinsey. And Tewari, who’s the Indian CEO started this company InMobi, did have an advertising technology. And he had global ambitions and decided he was going to go after the Chinese market. So the InMobi story is one of … Well, if you actually have a unique product, like, if you have a better mousetrap and you show up in a market with a better mousetrap, you can probably sell it, at least initially, until the local competition figures it out. And that was the InMobi story.

They showed up with a mobile advertising platform that filled an important gap in the marketplace when there weren’t other competitors. And that’s what gave them their initial toehold. But then it was Jessie Yang, who was just a force of nature as a CEO and the local CEO. And so, she at that point, basically treated InMobi as a start-up. And so, it was sort of Jessie’s start-up in China. And at a certain point, China actually started eclipsing the other markets. And so, I actually don’t know what’s happened in the last couple months. But when we interviewed Jessie for the book, she said, “You know, at some point, I went back to the mothership and I said we got a fork of the code here. And we’re gonna create our own Chinese version of this product, because we’re not responsive enough.” And so she did that. She had her own developers who developed locally. And then at a certain point, they and I think this is their grand plan. They’re going to spin out the company into two companies, because the Chinese market was sufficiently different and sufficiently vast that it could support a separate company, and that, in fact, would maximize the shareholder value of the original founding team.

And so, it’s a story in this case of getting super lucky with the CEO, but then giving this company who has an initial toehold, giving them enough autonomy to go build what was an essentially successful start-up within China.

[15:03] Yeah, I remember when I was reading the story …. What you say that Jessie is a force of nature … but it’s really important to point out she didn’t actually have any experience in this sector, right? She was like a consultant or something.

Yeah, she had no experience as an entrepreneur, and she had no experience in the sector. And that’s why I say she was a force of nature. I literally think it was just her … You just come across when you talk to her, she’s incredibly passionate, incredibly hard working, but also whip-smart, and has this really amazing global perspective on e-commerce and on entrepreneurship.

And do you think that for Jessie … You know, I understand she’s like really capable, but if she wasn’t given the sort of leeway to go and pursue this … I mean, I can’t imagine someone like, I don’t know, anyone from Uber China, or something is in the audience, going to headquarters and saying, “Hey, we need to completely have a separate app for the code. And it’s going to be we need a completely separate development team. And by the way, we’re just going to be a separate company.” You know, take Uber or any other large internet company … I don’t know how that would have been treated by them.

[16:11] Well, Rui, you’re getting it, what’s the central tension. Because if you’re not going to take advantage of the mothership, what are you doing, you’re basically just starting a start-up. And so, if you’re not bringing something from the mothership, you might as well be a start-up because there’s a lot of overhead and sluggishness that comes with coordinating with a global parent. And so, you better bring something very powerful to the table. If all you’re going to do is fork and become a start-up, you’re better off not having any ties to the headquarters because that stuff slows you down. And so, in some ways, it may be plated just right, what they brought initially was the original product, which was good enough to get started. But then when the sluggishness started to get in the way, they formed, and they went independent.

So you compare that to another example we have, which is LinkedIn. LinkedIn went to China and their strategy was to create a completely new app Chitu 赤兔. And then they had the worst of all worlds, right, because they didn’t have a powerful product from the parent. But they still had the sluggishness of coordinating with the parent. In that case, they played it exactly wrong. And it would have been better, just to have been a completely independent start-up.

[17:24] Well, that reminds me of another case study, which was actually so … I was a little bit more familiar with the LinkedIn story because I was actually there and had a dinner with Derek I think the day they announced Chitu 赤兔, and announced that he was joining and they were going to make this product. So I remember he was very full of hope. Although I think quite a few of us were skeptical about how it would be received by the population. But this reminds me of another case study that you had in the book, which I thought was super interesting, which is on Norwegian Cruise Line. I think you probably get asked this one a lot, because it was actually just really funny how they went to China, did a ton of customer research. And I understand it was really, initially actually very successful getting customers because they pick the right star, right? Leehom Wang 王力宏 to be their spokesperson.

Yeah, so Norwegian Cruise Line is a fascinating company. First of all, it’s not Norwegian, by the way, their headquarters is in Florida. And they kind of invoked this cool brand by calling it Norwegian Cruise Line. So they started off. You know, the cruise industry was pretty promising because it was a growing market for the Chinese, the affluent Chinese, also the emerging middle class. And the government was actually trying to encourage sports and cruise operators to be operating in China. So it looked pretty good. And so NCL did a ton of customer research. And they figured out that they wanted to build a cruise ship that would be really tailored to the Chinese consumer. So you might imagine what it looked like. It had a bunch of gambling, a bunch of online shopping. It was red and gold and had dragons, all that stuff you might imagine.

[19:01] And then, you know, sort of three things happened. The first thing that happened was a bunch of others, Carnival and others also entered the market at the same time. So there was a glut of capacity. And because they weren’t a well-known brand, they ended up with more of a middle-class customer base than an elite, affluent customer base. And the middle-class Chinese have very different spending habits from affluent Westerners. So they’re very budget-conscious. They don’t drink a lot outside of meals. So the bar business wasn’t that successful. The prices weren’t that great. So they are very price-conscious in the shopping. So the offerings were sort of a bust. But the most interesting thing is the customers observed that. Hey, wait a second. We thought we were going to get our Norwegian cruise experience or maybe an American cruise experience. And instead, we got a kind of silly knockoff of a Chinese experience. And that’s not what we’re looking for in our vacation. And so it actually … localizing actually backfired on them now. NCL also had a similar story to Amazon, which is they had huge opportunity cost.

And so at the time that Alaska cruise business was booming, and they had this brand new ship, the joy in China while there was unmet demand in Alaska. And they said, okay, screw it. And they spent $50 million to rip out all the golden and red, and to retool it as an American cruise ship and redeployed it in Alaska.

[20:28] I just remember very vividly like the example you had in the book of the Chinese customers weren’t pleased with, like all the karaoke rooms with Baijiu 白酒, when they were expecting like high tea with, you know, white loved waiters, speaking English. So and that’s what I’m thinking of when they were thinking of a cruise line. So I have one last question for Karl. And that is, okay, given the tensions today, between especially the U.S. and China, but I think there are multiple geopolitical conflicts going on. What do you think is the opportunity for foreign companies, so non-Chinese companies to go into China today? I imagine you’re getting lots of inbound inquiries from companies after your book is published. So what is your advice to people?

Yeah, well, we actually … So let me make a short pitch for the book. First of all, it’s a Wharton School Press book. And Wharton School is not really seeking to make money on its publishing operations. It’s really about disseminating information. This book is super cheap. It’s like 10 bucks on the Wharton School Press site. $11 on Amazon. And if you’re really too poor to buy it, send me a note, I’ll get you some bootleg PDF or something. But we do have a chapter … two chapters at the end that are really prescriptions for those who are considering entering China.

[21:43] And I would say … just a few comments on the current situation. I actually think that actually operating in China might actually be easier than doing an import-export arrangement. I mean, you could sell your products and services in China without actually operating in China through a partner distributor or through an import-export. But the tariffs right now, and the travel restrictions, all make that pretty dicey. And so, in some ways, it would be easier to actually operate in China than to operate it as import-export. That’s the first thing. The second thing is people, I think, focus on the industries that are highly restricted in China. You know, we look at Google and Facebook, and maybe even higher education. But the reality is, the vast majority of industries are wide open in China. If you want to do retailing, or consumer or even a lot of B2B products, there are very few restrictions. So, I think, really looking at the regulatory framework and understanding what is restricted and what isn’t, is pretty important. But then the most important question you got to ask is, in what categories and for my products and services, what ammunition do I really bring against local competition? And I think there are some categories where there’s some real opportunities. I think, first is, if your business, if it’s westernized, is in fact one of its distinctive characteristics, that can be an advantage.

[23:58] So if you think about the classic example, that would be Starbucks. It’s in fact, Starbucks is westernized, that is its distinctive advantage. And it makes it much harder for Costa, a local competitor to replicate that in China. So westerners and Western brands are certainly distinctive assets. The second kind of capability is, I think, anything that’s deep tech. I think, China … It’s still the case in China that the best and the brightest are still going after low-hanging fruit, entrepreneurial opportunities in China. So a lot of e-commerce, a lot of consumer apps, sort of straightforward consumer services. It is just so much opportunity that a lot of entrepreneurs are jumping right into those opportunities.

If you do something that’s much deeper tech, so I don’t know … Computer aided design for circuits, or, you know, sensors for electric cars, something which is truly deep tech, you’re much less likely to encounter severe competition in China, and you’re more likely to bring distinctive assets to the party. Those situations might work well. I think a big open question, maybe something our listeners can weigh in on and I know, Rui, you have some thoughts are … Enterprise software I think remains a pretty interesting question. Is there an opportunity for a Salesforce or LinkedIn, and in China, in the enterprise software space, we haven’t yet really seen that? Although I would predict that eventually, those companies are going to have to exist.

So, I would say, there’s still lots of opportunity. Be realistic about what the true regulatory constraints are, and then just do a really honest assessment of what you bring to the party. What is that you can uniquely do that will allow you to operate with the necessary coordination cost, would coordinate with your headquarters against a very scrappy, well-financed local competitor?

[25:05] Yeah, I definitely agree with a lot of these points that you raised. I think some of the deep tech places, because of U.S. sanctions, particularly on semiconductor, are getting filled up quite quickly, because China has elevated some of these sectors to the national level of importance. And so there will be a lot more funding being imported in. But I think that’s right, in general, that, you know, there’s still opportunity as for enterprise software. I don’t know that’s the million, or that’s the trillion-dollar question. Everyone … myself included. Because for me, I vacillate between like “oh, yeah, it’s coming really, really soon”, and “oh, no, it’s actually still another 5,10 years away”, because the way businesses run so differently there, the nature of the labor market, the level of education throughout the population, etc, etc, etc. I think overall it’s more hopeful than a couple years back.

Thanks for listening to the special live cast episode today. Do let us know what you think. My Twitter is spelled RUIMA and you can follow us @TechBuzzChina, @thePandaily and @supchinanews Tech Buzz China by Pandaily is powered by the Sinica Podcast Network on SupChina. Pandaily.com is an English language site that tells you everything about China’s innovation. Our producers are Bryce Ye and Kaiser Kuo. Thank you for listening!