by Claudia Bruemmer

Collective buying site Groupon hit the wall in China as it closed offices in various cities and let hundreds of employees go just before its planned IPO. So, what gives? Like so many other successful companies that want to expand business in China, Groupon fell into the China trap. It’s not the only company to do so – Google, eBay and Yahoo! have all run into business problems in China for one reason or another. If there’s a lesson to be learned by U.S. and foreign firms, it is buyer beware when selling to Chinese consumers or doing business in China.

According to the Wall Street Journal, current and former employees of the Chinese joint venture between Groupon and GaoPeng said that more than ten offices in China have been closed. An employee in the northern city of Tangshan said he and his co-workers were locked out last Friday, being notified of the closure right after their lunch break.

These office closings and personnel cuts reveal a sharp reversal of Groupon’s aggressive expansion into China which started in January. Since then, Groupon invested $8.6 million to gain a 40 percent interest in a joint venture with GaoPeng, which was also partly funded by Chinese Internet service portal Tencent.com and private-equity firm Yunfeng Capital.

Groupon and GaoPeng said the layoffs and office closures are necessary due to a change in strategy, but this does not change their commitment in China. The Wall Street Journal reported the current strategy is “to focus more on the middle to large-sized cities” in China where the market is “more developed,” adding that the company “is fully committed to the Chinese market for the long term.”

Evidently, Groupon’s international strategy is now focused on creating a presence in selected large cities and then refining plans as it gains momentum in local markets. Such adjustments to business plans are typical in today’s environment when companies need to move fast to change strategic direction according to market conditions. Even big companies like Google, eBay and Yahoo! have dropped product plans on a dime after seeing initial poor results. It’s become necessary to cut your losses and move on in today’s volatile market conditions.

It’s a well-known fact that U.S. and foreign companies should be wary when trying to sell Chinese consumers. Anyone following world news knows it’s hard to deal with the bureaucracy in China, which is less than transparent and can give conflicting messages out of Beijing.

A good rule of thumb in today’s environment is: if your business model is too easy to imitate, don’t flirt with death in a land where a Wild West business climate exists and thrives. Foreign business personnel who have lived and worked in China like to say that the Chinese use foreign companies that are flush with cash or are VC-backed in the following ways:

• To get training from
• To network with other peers
• To get complete knowledge transfer – from competitors with state and local backing!

“What happened to Groupon will, unfortunately, continue to happen, and many headlines like this will likely soon to appear,” opined Jason Prescott, Manufacturer.com and TopTenWholesale CEO. “It is impossible to change a culture so entrenched in imitation, where copycatting is ok and bending ethics is a way of life,” he remarked.

China can be a safe investment for companies offering services that help Chinese businesses grow outside of China, or those that sell a high-end luxury brand appealing to the nouveau rich who want the real deal. “Anything else – be afraid, be very afraid,” warns Prescott.

Prescott continued, “The Groupon mishap is very unfortunate for businesses considering an investment in China. We learned the Groupon lesson years ago and have since seen hundreds of companies large and small fall victim to the same promises of striking gold in China.”

Prescott has traveled to China since 2007and lived in Hangzhou many months while establishing Manufacturer.com. “The gold does not exist,” he declared. “Our business has thrived since changing direction and utilizing USA talent to advocate our services to Chinese businesses from our domestic branches,” he concluded.