China used to be a cash cow for western companies. Now it’s a test lab.

For Western companies in China, a new reality has set in: The easy money is gone and competition is only getting fiercer.

- Hannah Miao

As China's economic growth has slowed in recent years, consumers have become choosier about their spending. Meanwhile, the rise of formidable local rivals has crowded the market and driven vicious price wars, eating into profit margins.

International brands are getting more realistic. Their strategies vary by company and industry, but include tailoring products to Chinese tastes, developing them at a faster pace, marketing them differently and lowering prices.

Many companies can’t afford to ignore the country of 1.4 billion people, the world’s second-largest consumer market. And even if sales in China remain lackluster, some are eyeing the country as a critical innovation hub to learn from.

Olivia Plotnick, founder of marketing agency Wai Social in Shanghai, said she used to hear from American companies interested in launching in China. Since the pandemic, she estimates inquiries have dropped by about three-quarters. Instead, her clients these days are mostly foreign brands that have been in China for some time, but now realize they need to revamp their strategies.

“It is becoming a lot trickier for foreign brands,” she said.

Risky business

For years, as China’s economy expanded rapidly and millions joined the middle and upper classes, the country was a cash cow for companies such as Louis Vuitton parent LVMH, Starbucks, Nike, Apple and Tesla, which faced little competition from Chinese brands.

Now, homegrown rivals have overtaken Western brands in China in many industries. Starbucks recently announced it was selling a majority stake in its China business to Chinese private-equity firm Boyu Capital. The American coffee company has lost market share in China to cheaper, local rivals such as Luckin Coffee which dethroned Starbucks as the country’s biggest coffee chain by sales and stores in 2023.