Target’s Canada Pull-Out: The Lessons of Assumption and Adaptation
By Duncan J. McCampbell
January 16, 2015
The apparent causes of Target’s failure in Canada are well documented. They went in too big, too fast. Unresolved supply chain issues led to empty shelves. Add poor site selection, some poor store designs and questionable merchandising and, well, you have the makings of a case study that will be discussed in my International Business classes for years to come.
Target’s Canada experience is particularly useful to me as a teaching tool because Canada seems, well, so similar to the U.S. Yet it’s hidden surprises led a very successful U.S. company to suffer a $2 billion market entry loss.
I would like to see companies—particularly American companies—stop making the same, very avoidable and often rather spectacular, foreign market entry mistakes. Such mistakes—along with a few notable successes, provide a fascinating and dramatic backdrop for my upcoming book on corporate globalization entitled The Four Dimensions of Global Business.
I am not writing this to say ‘I told you so’ to Target. I might have made some of the same decisions and indulged in many of the same assumptions. It’s not harmful to have assumptions—we all do. What’s important is (1) knowing that you have assumptions; and then (2) what you do about your assumptions when they are proven false.
The Target Canada failure hits very close to home.
I know nearly a hundred current and former Target employees-many of whom were my best students. The Minneapolis campus of Metropolitan State University, where I currently lead the International Business program, is a mere three blocks from Target’s world headquarters.
Target’s Canada failure also feels a lot like a failure I experienced first-hand: Thomson’s smaller, but no less humiliating withdrawal from Germany in 2003.
Thomson swaggered into Germany in 2000 burdened with all of the assumptions that can come from long, seemingly effortless success in much larger, very different markets. Thomson needed to do some things in Germany—like make an anchoring acquisition the “German way”—that was just a bridge too far for that very Anglo-American company. In short, Thomson couldn’t adapt.
But wait, you say, that’s Germany. Can’t a Minnesota company be forgiven for assuming some things about Canada? They speak English, play a lot of hockey and drive Chevrolets. Don’t we share the world’s longest unfortified border?
But, you see, that’s just the point. It is one thing to believe (and then be relatively unsurprised when proven wrong later) that everything you do successfully here in the U.S. will also work a “very” foreign market—say China. You are prepared for surprises because the language, culture—everything—is so different.
But when the surprises happen (as they always will) in a market that seems so similar . . .
Today I quote the famous Prussian military strategist, Moltke the Elder, for a point that every internationally expanding company (even those eying “easy” Canada) should pound into its senior leaders:
“No plan of operations extends with any certainty beyond the first contact with the [enemy].”
Of course, you need a plan to go to battle. But winning the battle once it starts isn’t about how well you planned. It is all about how quickly you learn and adapt once the battle is joined.
So, my friends, go ahead and do your market entry research. Nurture and defend your fondest assumptions. Have your clever MBA’s build more of those fabulous ppt. decks that always impress and comfort the CEO.
But remember that when the first bullet is fired–when your in-country people actually enter the market–they will get kicked around. They will come back to the HQ bruised and bleeding to tell you things that you don’t want to hear because they shatter cherished assumptions and demand rapid, sometimes radical changes in plan. If the company can’t make those critical battlefield adjustments, then it’s just a matter of time (and money) before it’s all over.
Trans Flats and Other Oddities: China’s Evolving Property and Banking Systems
China is making a slow, cautious move from a state-managed production economy to a more consumer-driven economy, fueled by the as-yet restrained purchasing power of the world’s largest and fastest growing middle class.
While China is often able to do things at blinding speed, the change to a market economy must be done carefully to avoid major economic—even political–destabilization. Here are a couple areas of reform that, because of their potential impact on the global economy, as well as millions of Chinese, warrant regular scrutiny.
If you want to get an idea of the strange state of Chinese residential real estate, just look at the picture. This is an apartment building in one of China’s statistically invisible third-tier cities. Sitting side-by-side with occupied units, are vacant units–windowless, transparent voids have never been finished; most never will be. I call them “trans flats” because they sometimes allow you see right through an apartment tower. And like their unhealthy namesake, they have a sclerotic effect on the Chinese residential real estate market.
You won’t see these unfinished properties in Beijing or Shanghai, which is the worrying part. They are common in both new and old apartment complexes across the second and third-tier cities of China–the cities that the Chinese government is hoping will absorb the millions of people who are moving off the land in China’s urbanization program. What’s the problem? Well, the market isn’t functioning properly because these units actually aren’t technically vacant.
Let me explain.
While this building sits 50 percent uncompleted towards the end of its useful life, a block or two away, a brand new apartment building springs up, only to face a similar fate.
This is because most of the unfinished units aren’t unsold. They are owned by non-resident investors, often the very government officials who helped the developers secure the land and construction loans. These investors buy them—sometimes a lot of them–at discounts and hold them in their unfinished state as speculative investments. Steadily rising property prices over the last twenty years have made these among the safest places for the connected few to put their money.
Cavities of waste, they symbolize the decay caused by China’s sugary, GDP-at-any-cost diet, where real estate development was one of the only ways for local governments to raise revenue and achieve growth targets. But like a clogged artery, these properties take price-moderating capacity out of circulation–at a time when the Chinese government is trying to do two economically inconsistent things: keep the property bubble from bursting and creating a banking crisis, while meeting the affordable housing needs of a rapidly urbanizing population.
Necessary reform in the residential real estate sector is going to take another decade and will be intertwined with two other reforms that wait impatiently in the wings: (1) reform to the residential registration system (Hukou) which ties a citizen’s education and health benefits to their registered place of residence; and (2) rural land ownership reform, which will help China’s inefficient, under-mechanized, subsistence-driven agricultural sector become more productive.
Banking and Investment Reform
The Chinese are the world’s greatest savers. But the average Chinese citizen doesn’t have many legitimate options for putting those savings to work. There is no such thing as a 401(k) in China. State pensions pay little more than survival stipends. The few investment opportunities open to the average Chinese citizen are either very wimpy or very risky and possibly illegal.
If you are an average Chines citizen, you should think hard before investing in the Chinese stock market. The Shanghai exchange—recent gains notwithstanding—has developed a well-deserved reputation for being little more than a casino. Lax regulation and China’s inadequate corporate accounting standards mean that only insiders know what is really happening in many Shanghai listed companies. You can also forget about buying shares traded in more stable, more rational foreign stock markets. Chinese law prohibits that.
Deposit your savings in a Chinese bank account and you will earn a money-losing interest rate that doesn’t keep pace with anything. There is a reason for that. For the last 30 years or so, big Chinese banks (which are all state owned) have used a total lack of competition and the essentially free liquidity of citizen deposits to make often questionable loans to developers, local governments, and big state owned enterprises (SOE’s), many of which are now non-performing.
That China’s largest banks have huge bad loan exposure is well known, but because of China’s opaque financial reporting regulations, no one knows just how huge those liabilities are. Likewise, no one knows whether the government will make good on deposits if the banks fail. Sensing this lack of confidence and the impact it could have on bank liquidity, the government recently announced a proposed scheme to guarantee deposits.
http://dealbook.nytimes.com/2014/12/01/caution-over-chinas-deposit-guarantee/?_r=0
Limited investment options lead millions of Chinese to participate in the “shadow banking” sector, a frighteningly unregulated, very Chinese sort of private equity space that tends to promise, and sometimes even deliver, unnaturally high investment returns. According to an estimate published in The Economist, at least 30 trillion yuan ($4.9 trillion), or more than 50% of Chinese GDP is invested in shadow banking products. The government is constantly playing regulatory whack-a-mole in a futile attempt to rein in the shadow bankers, who always manage to stay a step or two ahead.
Market reforms in China should include the development of a normally functioning retail financial services industry with regulated (and taxed) investment products.
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