This is because the country’s middle class is simply enormous, growing from 3.1% to 50.8% of the country’s total population between the years 2000 and 2018. According to Brookings, there are now at least 700 million people in China’s middle class, and this group has never had more disposable income to spend on consumer goods and services. Despite the size and potential of the market, China is not an easy place for foreign businesses to enter. As this infographic shows, many of America’s biggest names eventually admitted defeat.
Companies by Tenure
The following table lists the tenures of every company included in the graphic. It’s worth noting that Google’s parent company, Alphabet, still maintains a physical presence in China. Google’s services were banned by the Chinese government in 2010. Dates were gathered from various media reports and sources. There may be small deviations from when a company actually entered or exited. The reasons for why these companies withdrew are surprisingly similar, and can be broken down into two broad categories.
Retailers Fail to Adapt
Failing to adapt to the cultural differences of Chinese consumers is a common mistake. Here’s how two American retailers learned this lesson the hard way.
Best Buy
Best Buy struggled because Chinese consumers were not willing to pay a premium for brand-name electronics. Local retailers could often source similar (or counterfeit) goods for much cheaper, and undercut Best Buy’s prices. Best Buy also made the mistake of bringing over its large flagship stores, which were out of reach for most consumers. Due to severe traffic congestion, locals preferred smaller shops that were closer to home.
Home Depot
The Home Depot expanded into China around the same time as Best Buy, but unfortunately it was another cultural mismatch. Home Depot failed to acknowledge that “do it yourself” repairs are not a strong cultural match for China. Labor costs are relatively low, so rather than do the work themselves, many homeowners prefer to rather hire someone else to do it. On the other side of the equation, the American brand failed to win over contractors doing the repairs and renovations. The Home Depot’s product offerings were also left unchanged from America, making them a poor match for local tastes. As a point of comparison, IKEA has had a presence in China since 1998, and continues to open new stores to this day.
Tech Firms Clash with Regulators
Uber’s experiences in China make a good case study on how American tech firms struggle to succeed in Asia’s biggest economy. For starters, breaking into the Chinese market was incredibly expensive. Uber spent billions on subsidies to attract customers and drivers, and losses were quickly piling up. To make matters worse, domestic rivals like DiDi were also handing out subsidies. On the operational side, Uber ran into several hurdles. To avoid issues with China’s data localization laws, the company needed servers on Chinese soil. Its navigation provider, Google Maps, also had limited accuracy in the country. This left Uber with no choice but to partner with Baidu, a Chinese tech company. The final straw, however, was likely a set of impending regulations which targeted the ride-hailing industry. Under these rules, Uber risked losing control of its data, and would need both provincial and national regulatory approvals for its activities. Even further, subsidies would also no longer be allowed. Uber realized that doing business in China was unsustainable, but its exit wasn’t exactly a failure. In 2016, Uber sold its assets to rival DiDi and took an 18.8% stake in the company. Ironically, DiDi is now embroiled in a conflict with Chinese regulators over its listing on the NYSE.
The Tech Fallout Continues
Since Uber’s departure, the Chinese government has increased their grip over the tech industry. This has driven more American firms out of the country, including Yahoo and LinkedIn, which is now owned by Microsoft. Both firms announced their withdrawals in 2021 and were rather clear about why they made the decision. Yahoo cited its commitment to a “free and open” internet, while LinkedIn says its decision was due to a “considerably more difficult operating environment and higher regulatory requirements”. Given the geopolitical tensions between the U.S. and China, companies that generate data (often seen as a national security concern) are likely to continue facing regulatory hurdles. Outside of tech, China is still a massive opportunity for American businesses. By 2027, the country’s middle class is expected to reach 1.2 billion people, or one quarter of the global total. on Both figures surpassed analyst expectations by a wide margin, and in January, the unemployment rate hit a 53-year low of 3.4%. With the recent release of February’s numbers, unemployment is now reported at a slightly higher 3.6%. A low unemployment rate is a classic sign of a strong economy. However, as this visualization shows, unemployment often reaches a cyclical low point right before a recession materializes.
Reasons for the Trend
In an interview regarding the January jobs data, U.S. Treasury Secretary Janet Yellen made a bold statement: While there’s nothing wrong with this assessment, the trend we’ve highlighted suggests that Yellen may need to backtrack in the near future. So why do recessions tend to begin after unemployment bottoms out?
The Economic Cycle
The economic cycle refers to the economy’s natural tendency to fluctuate between periods of growth and recession. This can be thought of similarly to the four seasons in a year. An economy expands (spring), reaches a peak (summer), begins to contract (fall), then hits a trough (winter). With this in mind, it’s reasonable to assume that a cyclical low in the unemployment rate (peak employment) is simply a sign that the economy has reached a high point.
Monetary Policy
During periods of low unemployment, employers may have a harder time finding workers. This forces them to offer higher wages, which can contribute to inflation. For context, consider the labor shortage that emerged following the COVID-19 pandemic. We can see that U.S. wage growth (represented by a three-month moving average) has climbed substantially, and has held above 6% since March 2022. The Federal Reserve, whose mandate is to ensure price stability, will take measures to prevent inflation from climbing too far. In practice, this involves raising interest rates, which makes borrowing more expensive and dampens economic activity. Companies are less likely to expand, reducing investment and cutting jobs. Consumers, on the other hand, reduce the amount of large purchases they make. Because of these reactions, some believe that aggressive rate hikes by the Fed can either cause a recession, or make them worse. This is supported by recent research, which found that since 1950, central banks have been unable to slow inflation without a recession occurring shortly after.
Politicians Clash With Economists
The Fed has raised interest rates at an unprecedented pace since March 2022 to combat high inflation. More recently, Fed Chairman Jerome Powell warned that interest rates could be raised even higher than originally expected if inflation continues above target. Senator Elizabeth Warren expressed concern that this would cost Americans their jobs, and ultimately, cause a recession. Powell remains committed to bringing down inflation, but with the recent failures of Silicon Valley Bank and Signature Bank, some analysts believe there could be a pause coming in interest rate hikes. Editor’s note: just after publication of this article, it was confirmed that U.S. interest rates were hiked by 25 basis points (bps) by the Federal Reserve.
