Localizing has been the mantra of many foreign firms in China, but in Nestle´s dairy milk case that failed. In his book The End of Copycat China: The Rise of Creativity, Innovation, and Individualism in Asia Shaun Rein explains what the Swiss company did wrong. A snippet from his book.
Vanessa responded, “I just don´t trust dairy products made in China, domestic Chinese or foreign brands. The supply chain is a mess. I will spend more if I trust the brand and quality.” Fears over another melamine scandal, or a botulism scandal, which struck New Zealand dairy company Fonterra in 2013, linger for years, and parents do not want to take any risks.
Her answer mirrored respondents on social media China Market Research Group (CMR) tracked and explained why foreign brands with cheap dairy products lost market share. For instance CMR did for a hedge fund analyzing baby formula, we found mothers correlated high price with safer products.
Many mothers responded they did not trust Nestle baby formula, for instance. Nestle located its dairy farmland in northeast China, a region known as China´s rust belt. From Nestle´s perspective, establishing operations there introduced international farming and quality standards and helped local farmers and the local community. Nestle instituted a cheaper price position than other international players.
But Nestle´s strategy backfired. Chinese mothers feared unsafe chemicals from decades of industrial runoff contaminated the soil, poisoning the grass, the cows, and finally the baby formula.
Users commented that Nestle´s price level, often 50 percent cheaper or less than competitor products, such as domestic player Biostime, slumped so low that they worried about quality control. Nestle´s problems in infant formula show the dangers of competing in China as a foreign brand – consumers perceive that foreign brands from Western developed markets, such as Switzerland, should be more expensive than local ones, or ones from developing regions, such as Thailand or eastern Europe.
Are you interested in more experts on innovation at the China Speakers Bureau? Do check our latest list here.