Chinese burned

“The wave of news stories about the rise in the Chinese market is creating a very distorted image of what it means to do business in this country and the risks involved.” This is the opinion of the director of a big Spanish industrial company with a presence in China. The director spoke on the condition that he was not named. “Currently, although the opposite image is given, very few Spanish companies are making a profit in China, and many are having great problems finding room for themselves in a particularly difficult market,” the director says.

Cases such as those of Revlon and Garnier, which this year decided to pull out of China, have shown that such problems are common to all foreign companies, although the idea persists that Spanish firms are finding it particularly difficult because they “lack the right background and financial resources.”

“Many companies are reaching desperation point. Traditional markets are not working and they’re convinced that anyone can make money in China. But they limit themselves to putting an intern in a business center and hoping for results that obviously will never come,” says the director, who is a leading member of the Spanish Chamber of Commerce in Shanghai. “The problem of human resources is a major one: they don’t invest enough in personnel, there is a lack of talent and the turnaround in staff is one of the highest in the world.”

Luis Galán, the manager of the 2Open consultancy in Shanghai, agrees. “China seems like El Dorado. However, it’s expensive to establish a foothold in the market, and Spanish companies are currently constrained by a lack of credit that dramatically reduces their chances of success. There are many who come with high hopes, but without a solid project, without an established product or without a competitive advantage.”

Whoever has a bad experience with a Chinese partner - one of the trickiest aspects of doing business here - comes away burned and distrustful.”

Eduardo Euba, Spain’s economic and trade counselor in Shanghai, also concurs with this view. “The presence of Spanish companies and products has often been characterized as being erratic,” he says. “If you have to keep at it in any market, that is even more so the case in China.”

Some projects have vanished without trace. A good example of this is the Spanish fast food home delivery firm Telepizza. It announced in 2010 that it planned to enter the Chinese market in association with local partner, pastry firm Christine. At the time, there was talk of opening up to 1,000 outlets in China over the course of five years. Three-and-a-half years later, nothing has come of the project. Telepizza continues to be totally unknown in China and although it maintains an office in Shanghai and its partnership with Christine remains in place, company officials acknowledge “there is no news as regards” the project.

It has been an equally bumpy ride for other Spanish firms in China. The jewelry company Tous, for example, is planning another foray after two previous failed attempts to get a foothold. It left over differences with a Chinese partner and is now more cautious. “That’s a fairly typical reaction,” Open’s Galán says. “Whoever has a bad experience with a Chinese partner - one of the trickiest aspects of doing business here - comes away burned and distrustful.”

However, there are other Spanish firms that are downscaling after being here for years. That is what supermarket chain Dia plans to do after a decade in the country, closing its 80 outlets in Beijing to concentrate on Shanghai.

The divestment after years of apparent losses is another example of the highly competitive nature of the Chinese market and the risks involved. Dia has failed to win over consumers, whose comments on the social networks point to the Spanish firm being a less attractive option than Chinese rivals Lianhua and Kuaike.

The Spanish fashion firm Desigual is closing most of its outlets in China after entering the country just a year and a half ago. “Prices and styles clash with the Chinese public. We only sell when there are big discounts,” one shop attendant in Shanghai says.

Iñigo Mendiburu, a director and partner of consultant Igeo Partners, believes that Spanish companies underestimate the problems of accessing the Chinese market and the competition they'll find there. “On the one hand, China is more a collection of markets than a single market, each with its specific characteristics, consumption patterns and consumer preference and practices. On the other hand, it's an extremely competitive market with all different sorts of players.”

Euba also warns about costs. “You can’t underestimate the costs of salaries, which are growing at an average of 10 percent annually, of real estate where prices are rising around 15 percent a year in the main cities, and of essential supplies, as well as the exchange rate, with the appreciation of the yuan having a big impact, a trend that is likely to continue,” he says.

The government has also withdrawn incentives it offered to foreign firms to set up in China, only maintaining them for companies that brought most to the value-added chain. For these reasons, China is no longer a good place to produce with a view to exporting and some companies are considering relocating manufacturing back home.

That is what Babyauto, a Spanish manufacturer of children’s car seats with production facilities in the Chinese coastal city of Ningbo, is going to do. Babyauto has launched its own brand in China - Babyauto More - but, as general manager Gabriel Eizaguirre explains, production of the model will be carried out in Spain, which has become much more competitive in the wake of wage devaluation. “We will produce the plastic pieces in Murcia and the textile parts will be made in Tudela by people with disabilities who have been laid off by Volkswagen after receiving subsidies to create jobs for them.”

Eizaguirre points out other advantages. “The containers from Spain to China are almost empty and transport is cheaper in the opposite direction,” he explains. “In addition, the Chinese consumer demands high-quality products and is prepared to pay a lot more for something that is made in Europe. One of our chairs that sells in Spain for between 79 and 89 euros in China costs 150 euros and the profit margin is greater. We’re also going back to Spain to protect our intellectual property. We invest a lot in research and development to allow our engineers to design products of the highest quality and we are aware that in China they may copy us.”