American corporations operating in different parts of the world face distinct challenges affecting the expansion, productivity and profitability in both developed and emerging markets. American brands face numerous hurdles such as limited financial regulations, currency convertibility, different legal systems, and cultural differences. The corporation analyzed in the paper is Nike and the region analyzed is China. In 2012, the corporation was certain about Chinese market such that it forecast that its sales would double to 4 billion USD in 4 years. However, this was not the case because its revenue has fallen for five straight quarters. The reasons for the decline are numerous and some of them are: Cultural differences, strong competition, poor labor conditions, among others. By analyzing Nike’s investment in China, the thesis explores the various challenges faced by the organization by using Hofstede’s cultural dimension model.
Some regions in the world such as Asia have a less robust financial system and thus, there are legal compliance issues for American companies. Ownership of wealth is concentrated in some areas and this accelerates the agility of domestic businesses. The legal system and cultural differences in different regions are distinct and thus, companies have to find ways of navigating trading laws and legal requirements. Moreover, labor requirements differ from country to country and therefore, corporations need to invest in knowledgeable corporate counsel (In Appelbaum " In Lichtenstein, 2016). Additionally, the political climate in many regions varies and may often change without warnings. The political set up of a region is likely to impact on the performance of American firms. For instance, corporations who have set base in Middle East and some parts of Africa receive insignificant returns because there is no stability.
The Challenges faced by Nike in China
Firstly, China has a high level of income disparity and their culture discourages the purchase of luxury goods. Nike’s running category has not received traction in China because health clubs are conventionally viewed as activities for rich people. The biking culture exists in China but people usually ride in normal street clothing instead of spandex. The challenge can be explained by Hofstede’s cultural dimension known as the power distance. The model argues that individuals in the society are not equal. At a PDI score of 80, China’s society believes that inequalities are acceptable and individuals are influenced by subordinate-superior trends (Wilsey, 2017). On the other hand, the United States has a power score of 40 and that means that the inequality is lower. High inequality rates result in low revenue because of the low purchasing power. Compared to other regions in the world, Nike’s growth in China has minimal. The graph below compares Nike’s revenues with other regions in the world.
Chart 1: China’s Revenue compared to other segments
Source: Wisley, 2017
From the graph, it is evident that the company is stagnating because of the various challenges elaborated in the paper. Compared to the United States, Nike’s Revenue derived from China does not meet the organization’s predictions. For instance, in the third quarter of 2016, the revenue from China was $ 1 billion compared to the sales values in the United States which was $ 4 billion (Wilsey, 2017).
Secondly, China’s poor appetite for sporting activities is another challenge faced by the organization. The corporation’s branding strategy is based on identification of superstars to brand its products. Nevertheless, the Chinese culture is strictly focused on academic achievement and thus, such a branding strategy is not likely to appeal to the region. Most people are exposed to sports in school or when taking part in physical exercises. Hofstede’s uncertainty avoidance element explains this point. According to the scholar, society deals with the unknown differently. Uncertainty brings anxiety. In this regard, China has a score of 30 while the US has a rank of 46. The Chinese are uncomfortable with uncertainty and they rarely accept change in their culture. In the US, there is a fair degree of acceptance for new and innovative products. The running culture is not there in China. Nike launched the “Never Stop Running” campaign in the US and it received positive response (Merkin, 2018). However, in China, running is not considered a social event and the Chinese people are not as image-conscious as Americans.
Poor labor conditions have resulted in factory strikes and anti-sweatshop protests which threatens the corporation’s operations. The growing problems are associated with the poor pay and inhuman conditions that Nike subjects its employees. Workers at Nike’s plants in Beijing work 11 hours a day and if they refuse to work for that period of time, they are fined $1.20 to $ 3.61 (In Appelbaum " In Lichtenstein, 2016). The employees only get 2 days off every month and there are insufficient safety regulations in the factories. For those reasons, the employees have protested severally (with the latest boycotts happening in late 2017). The challenge is clarified by Hofstede’s model of individualism. An individualistic society entails a situation where people look after themselves and their direct families. With a score of 20, China is a collective society and thus employee commitment is low. The US, on the other hand, has a score of 91. That means that American companies emphasize on individualism. The Chinese society collectively came together to dispute the historic underpayments and insufficient housing fund contributions.
Chinese culture encourages competitiveness and thus, the emergence of other brands has become a big hurdle to the company’s growth. Historically, Nike had a market share of 12.1 percent of the Chinese sportswear market. Adidas has rebranded by positioning itself as a youthful and fashionable brand. Recently, Adidas launched a high concept retail store in China and they have begun selling skinny fit jeans. So far, the company has grown its women business by 40 percent (Merkin, 2018). A decline in Nike’s competitiveness is consistent with China’s competitive society. Hofstede’s Masculinity element further elaborates this point. China has a high score of 66 and thus, it is evident that the Chinese are success oriented and driven. Regarding masculinity, the US has a score of 62. Thus, it can be equally compared to China in terms of competitiveness. Nike’s strategy of holding special training classes (as it is in the United States) has backfired and thus, the sales have not increased as they had earlier predicted (Merkin, 2018).
Nike is faced with various cultural and legal issues regarding the exploitation of the Chinese labor force. China accepts multinational companies because of the huge population that requires job opportunities. Although cheap labor is an advantage, the enterprise faces numerous malpractice suits and negative publicity by the media. Nike faces a long list of sweatshop allegations from 700 factories (Wilsey, 2017). The legal issue is relatable to Hofstede’s is long term orientation aspect. In this facet, China has a score of 87 because it has a pragmatic culture and thus they easily adapt. In this characteristic, the US has a score of 26 because Americans are practical and they have a strong idea of what is “good” and “evil”. Nike has moved its factories from the US to China because of the strict regulations in the States.
Table Comparing China and US using Hofstede’s cultural dimension
Hofstede’s cultural dimension
China (Blue)
USA (China)
Power Distance
80
40
Individualism
20
91
Masculinity
66
62
Uncertain Avoidance
30
46
Long Term Orientation
87
26
Indulgence
34
68
Source: Hofstede insights, 2018
Source: Hofstede Insights, 2018
The table and the graph is a summary of the analysis explained in the various sections of the paper. The blue color represents China while the purple ones represent USA.
Another cultural issue faced by the corporation is the nature of sporting activities in the region. Soccer and baseball have limited appeal in urban Chinese cultures. Nike has been targeting key players for sponsorship and they have been leveraging such sponsorships by signing contracts with large-scale leagues like English Premier League and the Spanish La liga (Wilsey, 2017). The strategy has not worked in China because there are no opportunities in China as they are in Europe. This challenge is explained by Hofstede’s last element also referred to as indulgence. China scores 24 in this aspect because they have a tendency of being cynic and pessimist. They do not put emphasis on leisure. In contrast, the United States has an indulgence rate of 68 because they have do not exercise much restraint when spending on leisure activities.
Conclusion
The paper evaluates Nike’s challenges in China by use of qualitative and qualitative analysis. Some of the challenges explored in the paper include high levels of income disparity, poor appetite for sporting activities, unappealing branding strategy, poor labor conditions, emergence of competitors and legal issues. Cultural misunderstanding arises from miscommunication. For an American company like Nike, it would be wise to employ a different business model when investing in a foreign market. Therefore, the corporation’s management should alter business practices to suit the host region.
References
Hofstede Insights. (2018). Hofstede’s
cultural dimension. Retrieved from: https://www.hofstede-insights.com/country-comparison/china,the-usa/
In Appelbaum, R. P., " In Lichtenstein, N. (2016). Achieving workers' rights in the global economy. (Rights, Action, and Social Responsibility.
Merkin, R. S. (2018). Saving face in business: Managing cross-cultural interactions.
Wilsey, M. (2017). Nike’s China problem. Forbes.
