Shanghai, China, 2016

“Two months to live,” Carrie sighed. She went on, “Doctors at a famous public hospital in Hangzhou gave my mother two months before she would die from cancer.” Carrie then smiled, “But then I took her to see doctors in Hong Kong. They gave her cancer treatments not available on the mainland, and she is still living two years later.”

I was interviewing Carrie, a forty-five-year-old woman, about why so many Chinese were seeking medical treatment abroad rather than at home. We were dining in a bustling restaurant nestled next to the Bund’s Peace Hotel, an Art Deco masterpiece built between 1926 and 1929 by Sir Victor Sassoon, a British Sephardic Jew. Like Sassoon, many Jews came to Shanghai in the 1920s and 1930s because of its visa free policies and built many of the landmark buildings in the city like Grosvenor House and Cathay Mansions. In the 1930s, the city drew 30,000 Jewish refugees fleeing Nazi Germany. Rumor has it that the Bund was named after the bunds and levees along the Tigris river by immigrating Baghdadi Jews.

Carrie told me how her mother had been diagnosed with cancer by doctors at a top public hospital in Hangzhou. They said her mother was going to die soon and nothing could be done. In preparation for death, Carrie began to put all of her mother’s affairs in order.

As a last-ditch effort, she flew with her mother to Hong Kong to get a second opinion. The oncologists in Hong Kong offered drugs not available in the mainland—and they worked. Two years later, Carrie’s mother, was alive and well.

Carrie thus began a routine of monthly flights to Hong Kong for her mother’s medicine. While many of the prescriptions were not yet available in China, equally important was Carrie’s distrust of drugs bought on the mainland. The only choice, therefore, was to visit Hong Kong directly or pay a premium for third-party daigou19 who purchase the products in Hong Kong and bring them back into the mainland.

Having to navigate and wade through China’s medical system is remarkably tedious and time consuming so Carrie quit her job as a lawyer to take care of her mother full-time.

Introduction of new medicines to the mainland takes years if not decades, as approval processes linger in the bottlenecks of China’s bureaucracy. An example can be found in the HPV vaccine Gardasil, produced by the U.S. pharmaceutical company Merck. Approved in 2006 by the U.S. Food and Drug Administration (FDA), Gardasil has yet to be permitted in China, more than a full decade later. Instead, rumor has it that an early version of a drug—covering only a fraction of the HPV strains protected against in America—is to reach China’s market in late 2017 or 2018. Following the lead of many other frustrated mainlanders, one of my employees at CMR actually took time off several times to get the full vaccine course done in Hong Kong. In the meantime, millions of Chinese children who could benefit will miss out on the vital immunization because of the sluggish regulatory process.i

Yet even for treatments approved by the China Food and Drug Administration (CFDA), purchasing domestically available medicines is a frightful process. Many Chinese simply don’t trust the quality or even authenticity of most mainland drugs. And such distrust is not merely limited to the medical sphere. Suspicious of a wide range of products—from baby formula to diapers—countless Chinese tourists buy products while traveling abroad, and many others purchase directly from foreign e-commerce sites that ship into China, such as vitamin maker GNC. Consumers are scared of buying shoddy products and pirated versions sold online in China, even on famous sites like Alibaba’s Taobao or Tmall sites, or in brick and mortar stores.ii

Carrie echoed this anxiety, complaining, “I go to Hong Kong even for medicines accessible in China because I’m worried they may be expired or counterfeit in local stores. Have you seen all the media stories of people getting arrested for selling fake drugs?”

She was right. Every several months, a new story comes out in the Chinese press featuring the police as they raid warehouses full of counterfeit or expired medical products. In March 2016, state media outlet Xinhua announced the arrest of 130 suspects in Shandong Province. Triggering a massive outcry, those arrested had sold over 20,000 batches of suspect medicine and vaccines for a total of $88 million USD. Many were reminded of the public health crisis of 2008, in which 300,000 children were sickened by melamine-tainted milk, produced by money-grubbing farmers and then distributed by those looking to gain an extra buck in the dairy supply chain.iii

To ensure her mother got genuine medicine, Carrie essentially had to smuggle Hong Kong-bought drugs into the mainland. Medicines—and similar products, like baby formula—brought into China by suitcase exist in a legal grey area. They have not been approved for sale and resellers do not pay mainland taxes. Customs authorities usually turn a blind eye to medicines intended for self-use rather than for resale. But it is common to hear of Chinese being fined or even arrested for entering the country with such products in their luggage.

But even in light of the risks, the practice is common, particularly among younger Chinese attempting to care for family members too old or ill to travel on their own. As Zoey, a twenty-six-year-old from Beijing told me, “Every time I travel to America or Hong Kong, I take a shopping list of medical products to buy for family and friends. My elderly parents want glucosamine for their arthritic joints; my sister wants waterproof Band-Aids for her daughter. I buy vitamins for myself.” For many, the benefit of attaining genuine medicine and health products for loved ones outweighs any risks encountered in Customs.

“I just don’t trust the Chinese medical system,” Carrie continued. “Our doctors might be good. But because of President Xi’s crackdown on corruption in the medical sector, eliminating bribery, how can I ensure the doctors will give my mother good care if I don’t bribe them? Even non-corrupt, well-intentioned doctors lack access to the resources available in Canada or Hong Kong. And besides, they’re too overworked.”

Paradoxically, the anti-corruption crackdown intended to ease patients’ minds has—at least in its initial stages—caused even greater worry. Seeing no sure incentives, patients and their families fear doctors will not give them good care unless they are bribed. As one family of a patient from Nanjing having back surgery told me, “If we cannot bribe the doctor, what motive does he have to take care of our elderly mother? Doctors are far too busy, and we have no personal connection with them.”

Fear of poor quality products and the mediocre services of doctors too busy to care for non-bribing patients is exceedingly widespread—occupying the minds of patients diagnosed with everything from cancer to cardiovascular problems to brain disease. In 2016, my firm explored these issues further, interviewing 100 wealthy Chinese (with liquid assets over $2 million USD) from four cities. Each interviewee either had family members who had traveled outside of China or had personally left the country for medical treatment, visiting the United States, Japan, Hong Kong, Germany, Thailand, or South Korea.

In our interviews, over 70 percent of respondents told us they either distrusted Chinese care for critical illnesses like cancer or cardiology—often because doctors lacked access to the newest medicines and equipment, or because hospitals themselves were so over packed. Particularly in China’s best public hospitals, doctors often see between one and two hundred patients a day, leaving literally no time to care for individuals for more than a minute or two—forget bedside manner.

Facing rising apprehension about subpar care and suspect medical products, China’s smarter hospitals have begun to counteract public fears. At Parkway Health in Shanghai, for example, nurses now break the seal of inoculation packages in front of patients, demonstrating that vaccines are to be trusted. Drug expiration dates have also been shown to patients in an effort to establish public trust.

***

When approaching these contemporary health care issues, we must take stock of three fundamental problems plaguing Chinese society today: (1) lack of trust; (2) inability to access products and services as a result of overwhelming state control; and (3) overt individualism in the often-unscrupulous pursuit of money. Wielding a huge impact on the Chinese consumer psyche, these three issues are essentially intertwined and can even be summed up by the first and most fundamental problem—lack of trust.

Permeating a variety of spending categories, lack of trust impacts consumer behavior in everything from immigration and tourism (as we shall see in Chapters 7 and 8) to routine local shopping. With far-reaching implications, it is a concept essential to anyone dealing with China—be it brands or policy makers. Diverging markedly from the American ethos of ‘trust unless burnt,’ Chinese nowadays do not trust anyone until they prove themselves trustworthy.

Given China’s contemporary lack of trust in the domestic market, foreign companies have the opportunity to tap into the Chinese consumer wallet by offering products and services not readily bought or trusted in China—such as the cancer treatments required by Carrie’s mother, for example. Growing nationalism and technical expertise have indeed seen many now flock to top quality domestic brands—trusted companies like Mengniu, Bright Food and Yili Dairy. However, Chinese consumers still demonstrate an overwhelming desire to buy imported brands in key categories, particularly those pertaining to health or the well-being of children.

One of the most popular purchases among Chinese tourists, for example, is condoms. Fearing the quality of China’s domestically produced condoms, many Chinese consumers get the contraceptive from Japan. Manufactured with faulty materials, too many condoms sold in the mainland are counterfeit, rendering them inadequate in prevention of sexually transmitted infections or pregnancy. In 2015, for example, Shanghai police announced the seizure of three million knock-off condoms containing toxic metals. In an attempt to offset distrust in domestic brands, savvier Chinese firms have begun buying foreign brands. Human-well Healthcare Group and CITIC Capital China Partners, for instance, teamed up to buy Ansell Ltd.—the Australian producer of gloves and surgical masks that owns the popular Jissbon condom brand. In a similar pursuit, China’s Biostime baby formula company recently acquired Australian supplement and vitamin maker Swisse Wellness.iv

To take advantage of this trend, foreign brands must position themselves as offering higher quality and trustworthiness—it does not make sense for them to compete with domestic brands on price. Local brands can always undercut pricing, often via unsavory means, and have consistently demonstrated willingness to take squeezed margins. As such, the only way foreign players should shift into cheaper categories is through purchase of local brands. If they otherwise attempt to compete on price, Chinese consumers readily assume that foreign brands are cutting corners in quality control.

And it is not surprising that they would do so. Given all the dangers of shopping in China, most consumers are extremely wary of even marginal indications that a product might be faulty or unreliable, from less glue to seal labels on a water bottle to thinner bottle caps. Even in the purchase of everyday consumer goods, Chinese buyers go to extremes in ensuring safety. I have interviewed dozens of shoppers, for instance, who not only rotate the milk and eggs brands they purchase in case one brand is bad, but also rotate the outlet from which they buy the foods. Diversifying risk however possible, they might buy eggs from one online one week like JD.com, at Carrefour the next, and then buy from a different online vendor like Yihaodian the week after. As one forty-something-year-old woman told me, “I run all water through two purifiers and then boil it afterward. I must take precautions in case the purifiers are counterfeit or bad quality. I tend to do this for about a week and then buy imported water from brands like Evian or San Benedetto the next.”

***

While many analysts are well aware of Chinese consumer distrust, both of brands and their distributors, few understand the underpinnings that have given rise to this culture. If Chinese society is for the most part free of crime and relatively safe, it seems quite paradoxical that lawbreakers in the business community, and fear of their illicit behavior, are so widespread. I have absolutely no hesitation walking anywhere in Shanghai at 2 a.m.—something I would never do in many U.S. cities, particularly big urban centers like Chicago or St. Louis, yet a trip to the supermarket presents myriad risks to the contemporary Chinese consumer. How do I know if my baby formula provider has cheated his way to profits by selling me poor ingredients? How do I know if the oil used by the restaurant is not recycled gutter oil?

To understand why China has become a no-trust society, it is important to home in on the underlying reasons for which many offenders have tainted the market and still continue to do so.

At the core of these factors is a paradoxical phenomenon that permeates modern Chinese psychology: extreme individualism brought about by the lack of civil society and an utter reliance on the Communist Party to fix all societal issues. Everything from China’s Non-Governmental Organizations (NGOs), to the majority of charities, to schools from elementary education through university, is essentially run by the government. In examining modern China, various analysts like Tom Doctoroff, the author of the book, What Chinese Want: Culture, Communism, and China’s Modern Consumer tout Confucianism as the lens through which to understand China—a country whose citizens sacrifice and sublimate individual desires for the betterment of the whole. Yet a closer look at the Communist political structure reveals that such a view may be somewhat shortsighted, particularly when probing consumer behavior. Much more attention needs to be channeled toward grasping the effect of collectivism on China’s modern day dynamics of trust.v

Tom Doctoroff is certainly accurate in claiming that Confucianism still retains a strong influence on contemporary Chinese culture—much as the Judeo-Christian tradition shapes the ideologies and social dynamics of modern America. Yet while his work holds validity, it largely glosses over the extent to which Communism plays a role in shaping 21st century Chinese culture—a phenomenon often left unrecognized. Many of China’s political critics have argued that Communism generates a culture of fear within the country, citing the state’s one-party system, lack of free speech, and heavy media censorship.

But these analyses largely miss the mark in explaining how China’s Communist Party exerts power internally today. Particularly in the past several decades, the Party has no longer gained its legitimacy through fear and violence. Prior to the 21st century, this was certainly not the case. The Communist Party often used violent means to consolidate legitimacy during the Cultural Revolution (1966–1976) and beforehand—notably when the Communists first came to power in 1949—and it still puts an immediate halt to violence by today’s criminals. Even when I first arrived in Tianjin, China in the 1990s to study at Nankai University, people I interviewed regarding political issues would bow their heads down and refuse to say anything. But these dynamics have shifted dramatically in the past few decades. Now Chinese feel relatively free to criticize problems in the system as long as they are not calling to rally for a protest or overthrow of the system.

Having matured and stabilized since its early days, China’s government now maintains its power by adjusting to the needs and demands of its citizens, a skill it has mastered quite well. Confirming this development, Harvard’s Daewoo Professor of International Affairs Anthony Saich and the bipartisan Pew Research Center have respectively found that 85 percent of Chinese tend to support the direction in which their central government guides the country. Such support is largely derived from government response to the needs of China’s population, rather than the Party’s cudgel of violence to maintain power through fear. Even the Big Brother-like camera system set up throughout the country by China’s public security bureau is typically applauded by the population. Providing a sense of security, it offers hard evidence in the case of an accident or crime.

In a different context—such as the police state of Stalinist Russia or Mao’s Cultural Revolution—fear of cameras and government violence would likely permeate the everyday behavior of common citizens. Yet there is little if any fear present among contemporary Chinese civilians on a day-to-day basis. As long as they are not rallying in protest, Chinese feel relatively free to express their opinions and criticisms. As Harvard professor Gary King20 has shown in a number of studies on China’s online world, Chinese netizens are free to express their thoughts, while the Communist Party merely seeks to guide public discussion rather than arrest those who offer criticism.vi

But while the Communist Party no longer consolidates power through fear, it does exercise an often-unintended effect on national culture given that the State takes credit for everything—from China’s economic boom of the past forty years to construction of a sports powerhouse in its 2008 Olympic games. As a result, the Party leaves little room for praise of individual achievements: Basketball player Yao Ming achieved world fame because he began his training under state tutelage; Wanda Real Estate’s Wang Jianlin succeeded as a result of his beginnings in an SOE where he built the needed connections; actors, actresses, and directors like Zhang Yimou or Chen Kaige made it to the big screen given their tenure at state-owned Beijing Film Academy, not on the basis of their own merits.

However, while such ascription of credit may seem harmless at face value, the Communist Party’s monopoly on recognition has unwittingly caused an over reliance on the government to solve most problems. As a result, a large majority of Chinese focus solely on bettering themselves or their guanxi group,21 and care little for the well-being and prosperity of others. Why help total strangers when that responsibility belongs to the Party? Why invest effort in halting the distribution of counterfeits if that is the job of China’s police force? Besides, a corrupt official might be involved so why risk crossing him?

Such entrenched absorption in the self stands at the core of people’s disregard for their external environment. Even walking down the street can be risky at times as a shopkeeper might throw refuse on the ground and hit pedestrians—someone hired by the Party will come and clean up anyway. The insides of Chinese homes and stores might be sparkling clean, but most homeowners and merchants don’t bother to think twice when littering or negatively intruding on the lives of surrounding passersby. Drivers weave in and out of traffic to go faster for themselves, even if it slows drivers behind them. Or they park shared bicycles from Mobile and OFO on sidewalks blocking others from walking by. In a reinforcement of the vicious cycle, Chinese will thus do whatever they can to protect their own guanxi group, quality of life, and fortune, yet expend little to no investment on others.

I have seen several serious car accidents, for example, that precisely underscore Chinese over-reliance on the Communist Party in resolving communal problems. When I run up to help, I see numerous Chinese crowding about—perhaps with a desire to give assistance, but often just standing around aimlessly. Part of their reason for remaining bystanders involves fear of getting into trouble (China only implemented Good Samaritan laws in October 2017). There are many cases of people assisting others only to be sued by the people they were helping in the first place.

However, the greatest cause of their hesitation stems from a general conviction that the Communist Party will fix everything for them. I often hear onlookers screaming above the crowds, ordering others to call 110 or 120 for the police or ambulance because they will be able to solve the problem best. And if either is slow to arrive, people feel justified in anger, decrying the government for not hurrying to help, yet all the while leaving their injured countrymen largely unassisted. A deeply ingrained conviction, issues and accidents in the public sphere lie within the jurisdiction of the central government—individuals simply lack the wherewithal to contribute. People therefore rarely take first aid courses to learn how they should help others in the case of injury. Acting on an embedded primary response, most Chinese simply call the government for assistance.

Yet the Party’s disproportionate absorption of credit has implications far beyond the realms of everyday accidents and neighborhood littering. Because the Party is credited for just about everything, any positive individual impact on society tends to be washed out by state praise. Either China’s media organizations applaud the Communist Party or praise the individual as a laudable Party member or product of the system.

Presented with virtually no avenues to accrue renown in the enactment of good deeds, many Chinese are thereby driven to selfish pursuits and individual gains—why contribute to society when I can profit more on my own? With a mentality of personal profit at all costs, large swathes of opportunistic Chinese individuals have found their own prosperity at the expense of others. As a result, while China’s homicide and theft rates may be lower than those of other nations, Chinese criminal behavior in the production and distribution of counterfeits or in general selfish behavior (like parking bikes anywhere convenient for them) has been much more widespread.

Few Chinese feel charged with the responsibility of improving their communities or working toward the greater good—even at a local level. For those more interested in local politics than in a lifelong Party career, it is impossible to run for city council or involve yourself on a school board without sacrificing involvement in the private sector. Limited by the rigidity of the system, you must choose at the start whether to become a government official, an SOE executive, or a member of the private sector. Barely any crossover exists between government stationing and jobs in the private sector.

However, while people may refrain from civic duties as a result of over reliance on the government, this is not to say that Chinese do not care for their communities. Many simply focus within the absolute micro-level—we might say mini civil societies—such as their families, their children’s sports teams, or school homerooms. Markedly distinct from governmental territory, these spheres are so minute and insignificant that government organizations do not even deign to get involved.

But Chinese want to do more. As witnessed during the Sichuan Wenchuan Earthquake in 2008—in which 69,000 people died and between 4.8 million and 11 million lost their homes—Chinese nationals from across the country donated incredible amounts in charity. Yet even when millions responded to calls of help for the motherland, the government led and controlled all aid work. Individual efforts have consistently been relegated to the margins, as people even now donate money directly through WeChat Pay or Alipay to those advertising their plights on social media. The Party thereby effectively replaces a true civil society while scattered individuals engage in one-off donations and mini civil societies.

In examining this phenomenon, I often contrast China’s mini civil societies with the stake placed by most Americans in building local communities. Habitually distrustful of the federal government, Americans tend to invest greater faith in local communities and thus demonstrate major interest in local political involvement—running for city council, joining school boards or volunteering for firefighter groups. A significant percentage of civil societies have also been established endogenously, such as the Elks Club or religiously affiliated organizations like synagogues and churches. In light of this contrast between American local civic engagement and Chinese reliance on the central government, we see an inverse relationship between Chinese and American perceptions of government branches. While Americans gravitate toward local politics, disparaging an unreliable federal government, Chinese do the opposite. Distrustful of corrupt local officials, Chinese citizens have largely invested their faith in the Communist Party and Beijing. Perhaps this is why you might notice Chinese parents getting more involved in their children’s classrooms, while American parents seek a voice in the school board or alumni organizations—realms often controlled by state organizations in China.

In business terms, however, this Chinese sacrifice of macro responsibility in favor of personal or familial gains has detrimental consequences. Without the institutionalized reward of contribution to the public good, companies in China’s private sector have consequently trended towards greed. Lacking the innate desire to build a stronger Chinese society, many businesses have therefore sold counterfeit or poor quality products, scheming their way to profits. And as we already explored above, Chinese consumers have grown painfully aware of the business sector’s highly prevalent trickery. With the exception of one’s own guanxi circles, it is woefully uncommon for Chinese to trust one another in the realm of trade.

A driver of Chinese immigration, outbound capital flow, and brain drain, this psychosocially embedded issue is not one easily overcome. On the endogenous level, a solution will require generations of morally oriented labor force members seeking avenues for civic engagement. And even then, such movements will likely require the coupling of government efforts to empower sovereign citizens—granting more accountability to common civilians in cooperation and local problem-solving.

Under President Xi’s administration, however, it appears unlikely that NGOs and similar organizations will be granted much sovereignty. In fact, the opposite seems to be occurring given the Communist Party’s tightening of control over NGO day-to-day business activities. Having effected new oversight laws on January 1, 2017, Beijing is now implementing closer supervision of Chinese NGOs as well as more stringent NGO application procedures. In some ways, it is important that the government begin codifying what NGOs must do to become legal entities, especially given that many operated illegally without paying taxes and failing to offer employees the requisite social security and healthcare benefits. However, many NGOs now face debilitating obstacles when seeking the government sponsors they need to register legally. And as all are now subject to stricter state control, many NGOs that stray from Party objectives have been labeled illegal and forced to shut down while other, more conforming, NGOs receive immense political support.

Even if the government is not pulling its weight in the pursuit of a civil society, it is clear that individual efforts have trended toward civic engagement. Evidenced by interviews with contemporary Chinese, especially younger citizens under the age of thirty, a large proportion of the population yearns to do more for its fellow citizens. Simply witness the rise of online giving, as people have begun to send money directly to those in need via WeChat and other online financial channels. Nonetheless, it is critical that more civic and charitable outlets be granted to Chinese seeking a qualitative say in their nation’s societal development. Otherwise, severe lack of trust will continue to permeate both China’s domestic market and the interrelations of Chinese citizens themselves.

***

As China’s domestic market continues to be plagued by consumer distrust, and as Chinese brands attempt to counteract it, foreign brands have an enormous stake in understanding the low-trust environment and in launching the right strategies to capitalize on it. Brands that remain oblivious to Chinese consumer red flags—product components most focused on by buyers—may often miscalculate, thereby losing an entire market. Take Swiss food giant Nestlé, for instance. Ever since its launch in China, Nestlé’s baby formula unit has continually underperformed expectations. Given the brands general approval, one might be perplexed by this data. According to my firm’s research, Nestlé even stands out to the Chinese as a trusted foreign brand, and most of its products have not done poorly. But Nestlé’s baby formula has struggled in China precisely because the company sources its formula dairy from Northeastern China. Widely considered China’s rust belt, the region’s soil was heavily polluted in the 1970s and 1980s, deterring even modern-day Chinese from consuming its produce.

When we interviewed Chinese mothers and mothers-to-be, they overwhelmingly stated that even if they trust Nestlé, they refuse to feed their babies any dairy products sourced from China. Curious as to Nestlé’s choice of China’s Northeastern producers, I asked one of Nestlé’s executives about the decision. In defense of the political tactic, he explained how Nestlé wanted to show China’s government that the brand was creating jobs in Northeastern China while also respecting local farmers. Its intentions were indeed good, but Nestlé had completely overlooked the extent to which Chinese mothers avoid feeding their infants Chinese-sourced dairy products, particularly as a baby’s main form of sustenance. Additionally, by competing so successfully on price, Nestlé unwittingly raised suspicion and lost clout among its key consumers. Unable to understand how a foreign brand—particularly from the expensive, developed nation of Switzerland—could be as cheap or cheaper than domestic Chinese brands, many Chinese simply assumed that Nestlé was cutting corners.

After all, even the most trusted of Western brands do not always boast a perfect track record. Leaving a foul taste in the mouths of Chinese patrons, several renowned Western brands have sold inferior products in China, while marketing them with the same label. Johnson & Johnson participated in the trend with a carcinogen-containing baby shampoo that had earlier been removed from American stores. Procter & Gamble (P&G) behaved similarly with its Pampers diaper brand. Many mothers told us they found domestic Chinese-made Pampers absorbed far less than Hong Kong versions, causing unhygienic leakage. Recognizing the problem, P&G started selling imported diapers as well as domestically produced Chinese versions. This unfortunately had the effect of causing parents not to trust domestically produced diapers even more.

By tainting the image of American manufacturers, these foul plays have opened the door for other foreign brands, particularly those from the Netherlands and New Zealand (and other countries that never set up domestically manufacturing facilities), with products with different ingredients than those produced in Western facilities. Projecting a coveted Western lifestyle, these areas are considered pure and trustworthy among China’s buyers, often enabling their brands to sell directly into China via online portals and daigou middlemen. For this reason, major supermarkets from the UK to Holland to Australia have had to impose limits on the number of baby formula cans allowed to individual buyers. As Chinese mothers depleted in-store supplies to bring formula back to China, local mothers were soon left without formula to feed their own children. This is especially true for smaller brands that have never created a China-only product version (unlike both P&G and Johnson & Johnson). Such smaller firms import the same products they sell in Western markets, garnering enthusiastic trust from Chinese. If embraced by Western home markets, these products are believed to be sufficiently trustworthy for China’s shelves.vii

On the basis of such convictions, brands positioning themselves in foreign, high-quality categories will do well in China’s domestically suspect markets—offering goods such as baby formula and health products. Apart from their own sales, however, foreign brands must also be aware of savvier local Chinese brands. Angling to inhabit the niche of trusted Western products, several domestic companies have recently created foreign-sounding brands, sourcing either raw materials or whole products themselves directly from overseas. In a concerted attempt to reassure consumers, these brands have jumped through all the hoops necessary to define themselves effectively—charging high prices; investing in top-of-the-line packaging; and simply expressing empathy to consumers via communication and guarantees of safety. Some companies, such as the previously referenced Humanwell Healthcare Group, CITIC Capital China Partners, and Biostime, even go as far as to make acquisitions abroad.

In order to capture market share and dissolve concerns over trust, foreign and Chinese brands alike need to position themselves as the most trustworthy brand. To do this, they need to focus on two key areas: (1) packaging, and (2) pricing. Unlike Nestlé’s water division which has focused on creating flimsier yet environmentally friendly packaging, brands should learn from Chinese water brands, Kunlun Shan or Tibet 5100, that both have rigid, luxurious feeling bottles. Chinese won’t sacrifice personal health to be environmentally friendly. Moreover, both of the domestic water brands have understood the importance of having a high price to signal safety to consumers. Kunlun sells for two to three times the price of Nestlé’s main line of water, Tibet 5100 four to five times as much (on par with imported Evian). Chinese equate higher price with better safety.

The fear of safety when buying products extends to products far removed from anything ingested or used on babies. For instance, one 28-year-old woman told me that she buys IKEA furniture products because she thinks the glue and varnish that IKEA uses must be of higher quality than those of regular Chinese brands.

As incomes rise, Chinese will continue to spend more money on healthy products. They will buy more natural products that are good for the health—from Manuka honey to blueberries to eggs fortified with DHA Omega-3s —but will spend more on more expensive products in categories. For example, the vast majority of 5,000 mothers my firm interviewed told us they would never buy domestic Chinese brand diapers in case the product quality was bad—yet at the same time would buy a conceptual foreign brand of diapers that was owned by a Chinese company because the processes were already in place to ensure safety. So while foreign brands need to focus on pricing and packaging to increase market share, the smart move for domestic Chinese brands is to go abroad and bring trusted Western consumer brands back into the country. Despite rising capital outflow constraints, regulators have been fairly flexible in approving consumer product acquisitions when the product is brought back into China.

Going forward, the lack of trust is an element that all companies need to deal with, whether they are selling into China or to Chinese consumers as they travel abroad. Focusing on building trust as either a large, trusted brand or a small but focused brand in a specific niche is the best way to gain that trust.

*****

Dialogue:
Frank Lavin, Chairman and CEO Export Now, Former U.S. Undersecretary of Commerce, Former U.S. Ambassador to Singapore

Rein: During the beginning of his term, Donald Trump has criticized China for unfair trade practices. Alibaba’s Jack Ma, however, told President Trump he thinks he can create jobs in the U.S. by having American small and medium enterprises (SMEs) sell to Chinese consumers online via Taobao and Tmall. Do you think a lot of jobs will legitimately be created in the U.S.? Will enough jobs be created to placate President Trump in his demands that China open up more to American businesses? Basically, are there good opportunities?

Lavin: Yes, although I think one has to look at Jack’s comments both symbolically and substantively. Symbolically, I think Jack Ma is doing exactly the right thing by signaling American businesses and government decision-makers that, when it comes to consumer retail products, China is generally open and American brands are well-respected. Chinese consumers have a real preference for U.S. premium products, lifestyle products, and so forth. So, his overt communication of this message has been well-executed, and it is one that should be heeded.

The substantive dimension of Jack’s comments, however, is more of an open question. In this realm, it raises questions such as, how many new companies are going to sign up? And how many jobs will be created? Such tangible considerations are more difficult to determine and predict. In fact, I spoke in June 2017 about this in Detroit while participating in Alibaba’s launch activity, Gateway ’17. Proceeding from the meeting between Jack Ma and Donald Trump, the conference hosted over 3,000 people, and we had numerous meetings. While there, Jack Ma expressed that he was going to reach out to U.S. SMEs to get them exporting into China. And I see that he’s been getting a lot of response and interest. How that translates into new stores, new sales, and new exports is a bit of an open question; it’s really a long-term project. But I’d say this stimulus of dialogue is where Jack really deserves applause. Regardless of the ultimate outcome—the ultimate statistical value of this exercise—both countries are better off if the Chinese e-commerce market is as open as possible to U.S. consumer goods. This also requires purposeful dismantling of the bureaucratic, regulatory, and functional impediments that now stop or hinder U.S. SMEs getting into that market. So I think Jack’s heart is in the right place, and I think he’s got a good message. He’s certainly doing everything he can to strip out those barriers to make it as easy as possible for many of these SMEs. So while we’re definitely going to see an upside to this, Shaun, the entry of a whole host of U.S. businesses to China’s market is rather difficult to measure in the first year or two.

Rein: Regarding the barriers you’ve mentioned, what types of barriers are there? How difficult is it for American SMEs to get through Customs or deal with tariffs? Are these true barriers, or are these relatively easy processes right now? Also, is it easier for companies to sell directly on Taobao or JD rather than setting up physical stores?

Lavin: I think there’s a cluster of barriers, all of which are navigable. But as a cumulative difficulty, the real barrier is lack of familiarity with the market, or just intimidation by the market. When selling into Canada or Mexico, U.S. firms tend to have a much higher level of familiarity, information is more accessible, and travel is easier. But given that many U.S. businesses have little acquaintance with the Chinese market, and China in general, these relatively standard barriers are viewed as insurmountable. However, when you simply peel apart these issues and ask, “What are the labeling requirements? What are the tariff barriers? How do you open up a store online?” they’re all very navigable. I would say it’s no more difficult to open up an online store in China than to open one in, say, Britain. But most Americans don’t approach the Chinese market from this premise. So, a lot of what Jack is doing involves consciousness-raising, cheerleading, and pointing people toward firms such as Export Now, because overcoming such entry barriers is precisely what we do. We work with any number of companies, resolving issues such as getting regulatory approval, determining the right labeling for the product, coming up with an optimal strategy, the right SKUs, the right price points, and so forth. In the realm of e-commerce, we talk about whether companies should establish a store on Tmall, Taobao, JD, or a standalone ‘.cn’ website platform, additionally identifying other aspects of the right e-commerce strategy. So oftentimes, while many of these strategies are not impossible to establish, companies need an advisor and friend to help them execute in China’s market.

Rein: So, are these services what Export Now provides? Can you give me an example of how Export Now works with American companies? What specifically do you do and what parts of the market entry process do you take on? If I am a producer of ginseng or chia seeds, for example, does my first call come to you?

Lavin: What we do is offer a cluster of services that allows any U.S. company selling online in the U.S. to now replicate their store in China. We’ll take care of inbound logistics, regulatory approval, testing, labeling, and all of the strategy work regarding products, price points, and all store operations—we’ll actually run the store. We have our own warehouses, our own fulfillment team, and our own customer contact team. Along with this, we conduct all social media efforts, take care of all the execution and contact work, and even cover financial settlement. So, you can run a China e-commerce store and never have to go to China. You don’t have to hire anybody in China or even legally set up in China. Providing a turnkey solution, we’ll deliver all these activities on an outsourced basis so you can replicate your domestic market activity in China for a nominal expense. In essence, Export Now is a one-stop shop and the end state covers all the functional barriers I discussed above.

Within our company, we refer to our services as providing a mirror image—meaning that both Chinese consumers and the Western businesses catering to them operate within their respective comfort zones. Chinese consumers can now access U.S. or international products through their favorite websites in their own language—customer support is in their language; support and delivery are both operated within their time zone; delivery cost matches that of domestic products; they use local payment instruments; etc. So, every functional aspect of the transaction is in their comfort zone.

Similarly for the U.S. exporter, every functional aspect of the transaction with which they have contact also remains within their comfort zone. They access information in their language; they work with a U.S. contract and a U.S. service provider; they pay and receive in U.S. dollars; they receive all reports in English; all of their account support operates in U.S. time zones. And in terms of account support, American servicers help them think through how to take advantage of the next Tmall sale or promotion, or assist them in determining how to enhance social media outreach in China. Companies therefore have a consultant, if you will, a U.S.-based brand manager who can help them execute in China. Just as articulated by our mirror image services, everybody stays in their comfort zone and products move ahead with expedience.

Rein: You’ve spoken fairly extensively about e-commerce and online platforms such as Taobao and Tmall. However, do you think that American companies need to also set up physical stores in addition to selling online? Or can they solely operate on the web? Tell me a little about your strategy in this realm.

Lavin: What we’re really recommending is an inversion of the traditional sequence. It’s important to first remember that there is a much higher density of e-commerce activity in China than there is in the U.S. In the U.S., about 10 to 12 percent of retail constitutes e-commerce activity. In China, this figure more than doubles, as about 20 to 25 percent of retail comprises e-commerce. And these figures are even higher for premium brands, reaching about 30 to 40 percent. This is because, when you’re online in China, you’re talking only with the more affluent half of the market, so premium brands tend to consistently outperform other brands in this group. To sum it up, we typically say that in China, every brand is a Dollar Shave Club; every brand can be a pure play, conducting most or all activity via e-commerce. But to your question, this doesn’t mean businesses need to operate exclusively online, even if it does mean that companies will likely perform better by starting off online in China. First, beginning through e-commerce is just simpler and less expensive than starting off by stocking physical stores in Shanghai, or even nationally. Operating online is also a very inexpensive way to refine your product slate, hone your pricing, adapt your messaging tactics, and develop your social media presence. Within a few months, you’ve already learned and grown significantly from all the online, real-time data that your business has accrued. Once you’ve established these fundamentals, it’s a lot easier to begin transitioning to offline distribution as well. Something we’ve seen time and again, in fact, is that offline distribution looks at online success as a validation point. As a result, brands that have already established online operations are much better off when talking to a firm that might own a dozen department stores in Shanghai. Naturally, you’re a lot better off having this discussion on the back of saying: “We’ve been online for six months. We’re selling at a run rate of about 20 million RMB a year. Can we talk about working together?” That’s a much more powerful discussion opener than, “I’m new in town, will you be my friend?” In this latter case, you would be negotiating from a position of much greater weakness given that you haven’t built out your online basis yet.

Rein: Right. So once businesses decide to build out online, what type of categories do you think American companies will see most success in? For example, are they better off selling food, selling apparel, or capitalizing on other categories? And regarding those categories that do best, what are some of the underlying reasons for their success in China? Are China’s versions simply too expensive? Do consumers not trust the “Made in China” label? So, to summarize, what categories do you think will do well specifically for Americans and why?

Lavin: There are a few answers to that question, and no single one can fully encapsulate an answer. But think about this general point: Almost anything imported into China from America is going to be a little bit more premium-priced. This is because American purchasing power is greater than that of China, and American consumer tastes, even in the mass to premium space—think Levi’s and Nike—tend to revolve around brands that are more expensive in China. As a result, it is critical for brands starting out to have enough brand strength that Chinese consumers are willing to pay that difference. You cannot compete on price, and certainly not in the commodity space. You therefore need to be able to say something compelling about your product that engages consumers in a way that makes them feel good about buying the product—in other words, they must feel compelled enough by the product that they don’t mind paying a price differential. American consumers are similar in many ways, but skill in courting the consumer is an attribute mastered by some brands and far more weakly developed by others. Typically, the apparel and cosmetics brands have done well in this realm, establishing a lifelong conversation with the consumer, but several other brands have largely missed the mark. These latter brands simply don’t engage consumers as a matter of course, failing to explain themselves well. Another issue is that some brands are so well-established in their home market that when they enter a new market, they find that their ability to court the consumer has atrophied or lacks versatility. Therefore, with regard to what you just asked, Shaun, one of the questions we ask ourselves is: “If you bought this product for yourself, or someone gave this to you as a gift, would you tell your friends about it? Is there a conversation going on about this brand and about this product?” And, of course, if the answer is yes, we realize that there must be a buzz here, and we can make this work.

Businesses need to realize that Chinese consumers are going to be every bit as sophisticated, curious, and conversational about products as American consumers. And the point is that if nobody’s talking about your product at all, it’s more of a commodity product. It serves as something purely functional. Think of a stapler, for example. You might need a stapler, and you might have to go to the store to buy one. But you’re certainly never going to give someone a stapler as a gift, and if you got any stapler, you’re certainly not going to e-mail your friends and say, “you won’t believe what I picked up today, I want to share this with you, here’s a photo of my new stapler.” It’s a purely functional product. So, if you were the largest American stapler manufacturer, and you said, “I’ve got a great line of staplers, I want to take them into China,” I’d have real qualms about that. Because with all respect, there’s nothing about this brand or this product that the Chinese consumer’s going to get excited about.

Rein: Your second largest stapler maker is our client. (laughs) And it hasn’t been easy!

Lavin: (laughs) Maybe we want to change the metaphor for this book so we don’t burn bridges there. (laughs)

Rein: We’ve primarily recommended a B-to-B strategy.

Lavin: B-to-B is not a bad idea. We’ve had clients like that too, and we typically tell them something along the lines of, “Look, the only people who are really going to buy this product are the other multinational corporations in China. The retail consumer is not going to seek out your product.”

Rein: So, for those brands just entering the Chinese market, how do you go about creating a buzz? If you are an SME and you’re using Export Now, what are the avenues used to reach consumers? Do you use WeChat? Do you use Facebook? Do you use Twitter? What other tools are there?

Lavin: Yes, we chiefly use social media. And to your point, China’s social media environment has its own distinctive participants, most of whom differ qualitatively from American social media users. Nonetheless, you can typically start by taking the content created for American users and localize it for different channels, such as WeChat or Weibo. Of course, specific channels will differ depending on what a company seeks to do and whom it wants to reach, but all brands need to have indigenous platforms so that they are inside the firewall, and then must localize their content accordingly.

To assist in this, Export Now undertakes a great deal of content analysis. And one methodology we follow when launching a new brand consists of first asking companies who their large to international competitors are. We then follow this up by probing their competitors’ activity on social media—specifically looking at their last 90 days of activity. Last year, for example, we did a major project for Victoria’s Secret, in which we took care of all of their launch activity. Comprehensively surveying Victoria’s Secret competition in China, we mapped out the main international lingerie brands selling on Chinese online sites, asking: Who are the main local brands selling to Chinese? What are they saying? How are they positioning themselves with the consumer? What’s their message to that consumer? And finally, in what ways, if any, must Victoria’s Secret modify its core message to reach the Chinese consumer more effectively?

Of course our clients at Victoria’s Secret were a highly sophisticated group, so our project for them included an extensive set of activities. The point, however, is that these launch and planning processes must be done through a well-established methodology in which firms play to their strengths and demonstrate integrity in their message. Now what does that mean? Integrity of message means that the same value proposition in a firm’s home market is equivalent to its value proposition in China. While the competitive map will be different, as will consumer culture, a firm’s value proposition can only be modified superficially to meet nuanced disparities in taste. As we say internally, there is one cup of Starbucks in the world. The cup of Starbucks you get in Shanghai is the exact same quality and the exact same phenomenon as that of the one you’ll get in Seattle, Paris, or Mexico City. And Starbucks quite appropriately claims that the Chinese consumer values its product in large part because there is only one cup of Starbucks in the world. So we would say the same thing to Victoria’s Secret or any other brand—there must be one level of quality; one reason or cluster of reasons for which a consumer segment is in love with this brand. And this will hold true for the Chinese consumer just as it does for the American consumer. One thing Chinese consumers really don’t want to hear is, “Well, this is the Chinese version of our product,” or “this is the third-world or emerging market version of this brand’s products.” Companies need to protect a universal phenomenon, ensuring that if a consumer were to visit one store location in the U.S. and pick something out, that the product would be exactly the same as one found in the firm’s Chinese stores. Of course, colors might be different, there might be other somewhat superficial elements of a product that will be adapted to the tastes of different consumers—the same reason for which Nike shoes might be colored differently in different nations—but quality must always remain consistent.

Rein: So it’s vital to maintain the same quality standards, or even heighten them in China, rather than reduce them to a third-world product line—something many multinationals might consider doing?

Lavin: Precisely. I would not go downmarket; companies would thus be destroying brand value, right? And such firms may have spent decades, if not a century, building up a message and a brand. It is critical that they keep both of these intact. The formulation and experience of a brand’s product itself must remain the same in every single market.

Case Study:
Bring Chinese Consumers Overseas Products and Services They Cannot Get in China Due to Lack of Trust, Lack of Availability, or High Prices

As we have seen at length in this chapter, Chinese often look to offshore destinations for products and services they are otherwise inclined to distrust in the mainland. Seeking better quality goods and services—particularly in the categories of critical purchases and prestige-granting goods—Chinese will either enjoy services abroad or bring their foreign buys back home with them.

In addition to individuals stuffing their luggage with self-care products, many official distributors have long since begun capitalizing on Chinese demand for offshore goods and services, particularly in the healthcare sector. Populating China’s market with foreign medicine, vitamin, supplement, and health food brands, many are selling to Chinese consumers through gray-area online markets and sales channels called daigou, where people buy products offshore and then re-sell them in China at high markups. Riding the wave, Hong Kong pharmaceutical retailers from Watson’s to ParknShop have profited handsomely, selling healthcare products either directly to Chinese tourists for the purpose of individual consumption or for domestic online resale.

Moreover, as Chinese buyers shift from spending on products to services, foreign brands now have the opportunity to bring such services directly to the consumer—but with a twist. Instead of merely establishing operations in China and serving Chinese at their doorstep, companies are beginning to bring Chinese consumers to their own overseas operations. Take medical tourism start-up Med-Bridge Health Management Consulting Co., Ltd., for example, a group funded by Kamet, the private equity arm of French insurance giant AXA.

Mindful of the reality that wealthy Chinese regularly opt for overseas treatment of critical conditions for both themselves and their family members, Med-Bridge is setting up a program to transport Chinese patients overseas for cancer care. And luckily for both MedBridge and its clients, many Chinese—even wealthy nationals—lack medical insurance, leaving the company unburdened by rigid insurance terms, which often restrict a patient’s pick of hospitals and doctors. Or they have expensive international insurance that gives them the flexibility to choose whichever doctor in the world they want to see.

Regardless of where Chinese patients want to travel for optimal medical care, Medbridge wants to meet consumers on their terms. Facilitating everything from finding doctors to booking hospital rooms, MedBridge essentially plans to arrange the whole trip. As Pierre Janin, the CEO and Co-Founder of MedBridge, explained to me, “Cancer in China is a growing health concern creating a huge pressure on the healthcare system. In cooperation with Chinese doctors, we connect patients to the best medial teams and hospitals in the world not on in the U.S. but also in Europe to be treated. Patients seek a high quality of care and doctors connect with the best international oncology experts. We are a bridge. It is a full journey from second medical opinion up to rehabilitation.”

Other popular destinations are South Korea for cosmetic surgery. Chinese trust the quality of care, as well as the expertise, in South Korea. Drawn by how Korean television drama stars look, over 60,000 Chinese travel to Seoul annually for medical treatment, with much of the trips to have plastic surgery in hospitals like BK Hospital or JK Plastic Surgery Center.

The results of the surgery can be so dramatic that some women are having problems getting back through Customs because they look so different.

Overall, until more private clinics and hospitals at the high end open up in China, the outbound trend of medical tourism will continue. This is especially true in critical care and in beauty treatments that patients consider critical, like a nose job.

While more and more hospitals are indeed opening up, they are limited in speed of growth by lack of suitable real estate locations and regulatory challenges. The anti-corruption campaign too is slowing the constructions of medical facilities as well because officials are worried about green lighting large, new heath care projects and getting accused of being corrupt.

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