Have American brands been squeezed out of the Chinese market?

The era of collecting premiums by relying on the "Made in the USA" label is over.

Once, the Chinese market was seen as a "gold mine" by American brands. The huge consumption power of its 1.4 billion population drew giants including Nike, Starbucks and General Motors to rush into the market one after another. But now, the wind has shifted.

Geopolitical frictions, coupled with the strong rise of local brands, have left many American companies struggling to move forward in this market.

The Chinese business of sports giant Nike has shrunk by nearly 30% from its peak, and consumers consider it "irrelevant"; Starbucks has lost its limelight to local rivals such as Luckin Coffee through price wars and faster innovation; General Motors has even fallen from making billions of dollars in annual profits to consecutive losses.

Experts from Bain & Company pointed out that the problem does not lie in China, but in the fact that American brands have not truly adapted to the changes here. Local enterprises have faster innovation cycles and more flexible distribution, and the high premium of American products can no longer convince savvy Chinese consumers.

Of course, there are exceptions. Lululemon, Ralph Lauren and KFC still maintain strong growth. Their common point is that they have done a good job in "basic skills", that is, providing cost-effective products and telling localized brand stories well. For other American enterprises, if they want to reverse the downward trend, they cannot just copy the global model, but need to deeply cultivate the local market and show sincerity.

The rules of the Chinese market have changed completely

There is a term called economic rent, which means the profit earned exceeds the minimum return necessary to maintain the business.

American brands have earned rent in China for many years, and it is a special kind of information rent.

From the 1990s to the beginning of this century, when a Chinese consumer walked into a shopping mall and saw Nike, Starbucks and Buick, it was easy for them to judge that these were American products with better quality, higher grade and higher reliability.

This judgment did not come from product comparison, but from information asymmetry. Consumers did not know that the Chinese supply chain could already make products of the same quality, nor did they know how local brands performed. As a result, the very label of "American" became the right to set prices.

Social media, review platforms, e-commerce comment sections, and factory transparency have gradually erased this information asymmetry.

Consumers began to find that Nike's sneakers and some domestic sneakers may come from the same OEM line; there is no essential difference in the cost of coffee beans and milk between Starbucks' latte and Luckin's latte; General Motors' Buick GL8 is still comfortable to ride in, but Denza D9 and Zeekr 009 have taken the lead in intelligent cockpit and assisted driving.

When these facts are placed on the table, brands are forced to return to their original position, that is, they must provide real product added value to qualify for charging a premium.

The predicament of American mass brands in China is essentially the dissipation of their mystique.

Consumers used to pay for the American label, but now they are only willing to pay for real differences. This change happened earlier than any political event. Once the information rent disappears, it is very difficult to restore.

Cultural admiration was once an important asset of American brands. Hollywood movies, American TV series and pop music conveyed an imagination of lifestyle to Chinese consumers.

Nike's Air Jordan sneakers, Starbucks' green mermaid, and General Motors' Buick sedans all benefited from this imagination.

However, with the growth of China's economy and the enhancement of cultural confidence, this sense of admiration is weakening. The younger generation of consumers has seen a wider world and is more willing to pay for local design and local aesthetics.

Nike's situation is the most typical. After 2021, its Chinese business has shrunk by 30%, and its annual revenue has fallen to the lowest level in eight years. China used to be its fastest-growing market, but now consumers prefer local brands. Nike is reforming its distribution model, but the time window left for it by the market is very narrow.

Starbucks entered China in 1999 and spent more than ten years making China its second largest market. However, in recent years, it has been chased and suppressed by Luckin Coffee with lower prices and faster store opening speed.

The number of Luckin's stores in China has exceeded three times that of Starbucks, and coffee priced at 9.9 yuan per cup has become a daily choice for many young people. Starbucks certainly wants to fight back, but its global cost structure and brand positioning determine that it is difficult for it to fight a long-term price war in a local market.

Beauty retailer Estée Lauder has encountered strong headwinds in the Chinese market, and its CEO admitted on a conference call that double-digit growth cannot be seen in the short term.

Gap sold its Chinese business to e-commerce company Baozun for $40 million in full cash in 2022, due to slowing business and its failure to establish connections with Chinese consumers.

After Baozun took over, it adjusted its local strategy, achieved break-even for the first time earlier this year, and plans to open 50 new stores in mainland China in 2026.

This comparison is very illustrative: the brand remains the same, but once the local operation capability changes, the result will change accordingly.

One iteration per week, who can keep up?

The disappearance of information rent explains why American brands are no longer selling well, and the gap in organizational speed explains why they cannot catch up. As we know, the innovation rhythm of local Chinese brands has been fast enough to be calculated on a weekly basis. Luckin can launch a new product every week, Anta can quickly launch limited colorways and shoe models for the segmented needs of Chinese runners, and BYD can launch multiple new cars within a year and adjust prices quickly. Behind this speed is a set of localized, flat decision-making system.

American brands are completely different.

Any important decision of Nike, Starbucks, and General Motors has to go through layers of approval from the global headquarters, regional headquarters, and local market. By the time a plan is approved, the market window may have already closed.

The Austrian School talks about the market process, where entrepreneurs profit by discovering opportunities and acting quickly.

Local Chinese enterprises are more keen arbitrageurs. They can discover the unmet segmented needs that American brands have not covered, and then quickly fill the gap. This kind of arbitrage mainly relies on the advantages of organizational structure, with very little luck involved. When Starbucks emphasized the "third space" in China, Luckin turned coffee into a grab-and-go refreshing drink, and pushed the price down to 9.9 yuan through digital ordering and extremely high store efficiency.

Starbucks certainly sees this trend, but it cannot complete product testing and launch within one or two weeks like Luckin.

There is a generation gap in speed when a heavy-asset decision-making system of a global organization faces a localized light-asset innovation system.

The direct consequence of the speed gap is that American brands are always catching up, while local brands are always defining demands.

By the time Nike realized the need to attach importance to the segmented Chinese running shoe market, Anta and Li-Ning had already covered the full price range and product lines; when General Motors decided to increase investment in electric vehicles, BYD and Geely had already made intelligence and cost performance exceed consumers' expectations.

This explains why American brands are becoming more and more passive in the Chinese market.

Clothing brand Abercrombie & Fitch is reportedly looking for local partners in China, hoping to transfer business control to improve performance.

Tesla has also spread news that it is considering selling or spinning off its Chinese business.

The common point of these moves is to hand over local operations to people who know the local market better, but this also means that the brand headquarters is getting farther and farther away from the front line.

Some people will ask, why don't American brands spin off their Chinese business separately and adopt an independent decision-making and pricing system?

The reason lies in the consistency of global brands.

The price, product line and marketing narrative of a multinational brand need to be relatively unified, otherwise it will affect the pricing power in other markets.

Price reductions in the Chinese market will erode the global price system through daigou (overseas purchasing), cross-border e-commerce and information dissemination.

What American brand headquarters worry most is usually not that the Chinese region earns a few percentage points less, but that the radical strategy of the Chinese region will disrupt the global chessboard. This concern makes them more constrained when facing local price wars.

Those who can afford losses win

But speed is only half of the problem, and the other half lies behind capital.

Local brands dare to fight price wars, but American brands dare not follow. Behind this is two completely different logics of capital.

Price wars in the Chinese market are often criticized as vicious competition, but there is a deeper structure behind it, that is, the asymmetry of capital patience.

Local Chinese brands, whether new energy vehicle enterprises or coffee chains, are often supported by industrial policies, local governments, platform capital and patient capital in the primary market. They can accept low gross margins or even phased losses in exchange for market share and user habits.

BYD can fight price wars because it has vertical integration capabilities in batteries, chips and vehicle manufacturing; Luckin can sell coffee at 9.9 yuan because it has digital operations and franchisees to share costs.

Their capital is willing to wait, calculating returns on a ten-year basis.

American listed companies do not have this condition.

Wall Street requires impressive EPS every quarter, and requires management to repurchase stocks and maintain gross margins.

If Starbucks fully follows the 9.9 yuan pricing in China, its global profit statement will deteriorate immediately, and the stock price will punish the management. If General Motors cuts prices indefinitely in China, the board of directors and trade unions at its Detroit headquarters will not agree either.

As a result, American brands fall into a prisoner's dilemma: they clearly know that not cutting prices will lose share, but cutting prices will hurt the global pricing system and shareholder returns.

Local Chinese brands do not have this burden. They can pursue market share first and then pursue profits. This is not unfair competition in essence, but two kinds of capitalism competing: one operates on a quarterly basis, and the other on a ten-year basis.

This difference in capital patience has led to a strange situation: in the Chinese market, the most radical players are often mature local enterprises supported by patient capital, while cash-strapped start-ups do not have such confidence.

American brands still have advantages in technology, brand awareness and globalization experience, but in this local battlefield in China, their hands and feet are tied.

Quarterly financial reports are like a rope that prevents them from going all out.

Even Procter & Gamble is feeling the pressure in the Chinese market. The sales of its premium skincare brand SK-II have fluctuated, and the reduction of Chinese consumers' travel and spending cuts during vacations have hit SK-II, which relies heavily on travel retail and duty-free shops.

At the end of 2023, SK-II sales also fell due to anti-Japanese sentiment.

Procter & Gamble executives acknowledged that the Greater China market is sluggish and highly competitive, but they also said that some brands still maintain strong performance in the Chinese market, and some segmented markets are more affected by the consumption environment than the loss of brand assets. This judgment points out the key: the environment is difficult for all brands, but some players can always gain market share through localized innovation.

Politics is just noise

Many people attribute the decline of American brands to Sino-US geopolitical tensions. It is true that political factors are part of the reason, but they are more like an accelerator. What really determines the fate of brands is product power and price.

There is a concept called the country-of-origin effect. When consumers find it difficult to judge the product itself, they will use the country of origin as a shortcut to judge quality. However, this effect has a premise: when the core attributes of products are not very different, emotional preferences will play a decisive role.

Conversely, if there is a significant gap in product power, political sentiment can hardly change most people's purchasing choices.

The country-of-origin effect also has an important boundary condition: the less consumers know about the product itself, the more they rely on the country of origin label.

In the past, Chinese consumers were not familiar with the core technologies of sneakers, coffee and automobiles, so the American label was a labor-saving judgment tool. Now, Bilibili, Douyin and Xiaohongshu are full of teardown reviews and supply chain popular science content, and consumers are becoming more and more knowledgeable.

The weight of the country of origin label naturally decreases.

When geopolitical tensions rise, this decline is further amplified, but the root cause lies in the change of information structure.

This means that if Nike's sneakers, Starbucks' coffee and General Motors' cars still have a significant lead in product power, Chinese consumers will most likely still buy them even if there are political tensions. The reality is that local Chinese brands have caught up with or even surpassed American brands in cost performance, design, intelligence and channel response speed.

At this point, national sentiment becomes a marginal reason for choice.

When Chinese consumers say American brands are out of the game, there is very little hatred in the subtext. The core is that these brands are no longer worth the price. Hatred can dissipate over time, but the reversal of the value equation is difficult to reverse.

In this context, some capital moves of American brands are easy to understand. Starbucks established a joint venture with Boyu Capital, Gap sold its Chinese business to Baozun, General Motors restructured its Chinese business, and Abercrombie & Fitch looked for local partners. On the surface, these are retreats, but from a financial perspective, they are rational option operations.

In the past, Chinese business was a growth option for American brands, and Wall Street was willing to pay a high valuation for it. Now Chinese business has become an uncertain asset, with declining revenue, shrinking profits and rising geopolitical risks.

Wall Street no longer rewards China exposure, but rewards de-risking instead.

Therefore, American brands have chosen a compromise strategy, that is, to retain brand authorization and a minority stake, and transfer local operation risks to local capital. This is equivalent to selling a put option while retaining a call option. If the Chinese market recovers in the future, the brand can still share the benefits; if the market continues to deteriorate, the losses will be borne by local partners.

However, this kind of operation has side effects. It will further weaken the local capabilities of American brands in China. Without operation rights, there will be no product decision-making rights; without product decision-making rights, it will be impossible to quickly respond to local demands.

The final possible scenario is that the capital remains, the brand remains, but the competitiveness is gone.

Why can Lululemon still grow by about 20% in China, Ralph Lauren by 40%, and KFC remain the most familiar foreign catering brand for Chinese people? They did one thing right: focus on local relevance, and put the American label in a secondary position.

What Lululemon sells in China is not just yoga pants, but also the identity and sense of community of middle-class women in first-tier cities; what Ralph Lauren sells is not just the old American money style, but also the aesthetic symbol of quiet luxury; KFC in China is no longer just American fried chicken, it has rice, soy milk and fried dough sticks on its menu.

In contrast, Nike is still talking about the American sports spirit of "Just Do It"; Starbucks is still emphasizing the global template of the third space; General Motors is still selling the old narrative of American luxury.

These narratives are already outdated in the eyes of Chinese consumers.

Ford has shifted more of its business and sales operations to the United States in recent years, and plans to move Lincoln vehicle production from China to the United States starting in 2030. Ford's sales in China fell by 32.4% between 2018 and 2022, a figure that reflects the overall ebb of the American auto industry in China.

Ten years ago, China was Detroit's biggest growth imagination; ten years later, local Chinese car companies have not only seized market share at home, but also begun to export to Europe, Canada and South America. More and more Chinese consumers choose electric vehicles for price and quality reasons. New energy vehicles accounted for 65.1% of total new passenger car sales in China in July, 11 percentage points higher than a year ago.

This speed far exceeds the pace of electrification transformation of American brands.

Therefore, in my opinion, American brands have not been collectively eliminated in China, but have been forced to stratify.

Mass brands with excessive premiums are out of the game, while professional brands and emotional brands are not. The situation of the Chinese market today may be the future of the global consumer market. Brands must prove why they are worth the premium, otherwise no nationality can save them. The ones that can survive are often the brands that know China best, and the American label itself cannot help.

Those that cannot survive are mainly eliminated by their own arrogance and sluggishness, and political factors only accelerate the process.

Chinese consumers have not closed the door, we have just raised the threshold.