Many leading American digital firms, including Google, Amazon, eBay, and Uber, have expanded internationally by introducing their products, services, and platforms in other countries. However, they have all failed in China, the world’s largest digital market. A comprehensive five-year study systematically identified the reasons behind these failures. The research drew on interviews with executives from leading Western firms and their Chinese competitors, and with seasoned expert observers in China. The executives pointed to a lack of strategic determination and patience by the Western firms as the cause of failure. The expert observers had a different take, pointing to the failure of the Western firms to adapt to China’s business environment. Both groups agreed on several steps that Western digital firms could try to get back in the game, including improving their understanding of China’s business environment, becoming more effective at strategy making and communication, and improving in operation and execution. But it’s important to remember: Sometimes doing everything right is just not enough.

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Many leading American digital firms, including Google, Amazon, eBay, and Uber, have successfully expanded internationally by introducing their products, services, and platforms in other countries. However, they have all failed in China, the world’s largest digital market.

The widely touted reasons for these failures include censorship by the Chinese government and cultural differences between China and the West. While these factors undoubtedly have played a role, such explanations are overly simplistic. Google, for example, has succeeded in dominating many foreign markets that have radically different political systems and cultures (including Indonesia, Thailand, and Saudi Arabia). And these factors have not stopped Western multinationals from succeeding in China in car manufacturing, fast-moving consumer goods, and even sectors where culture plays a key role, such as beer, coffee shops, fast food, and the film industry. There are deeper reasons behind the systematic failure of Western digital firms in China. (The term “digital firms” refers to those companies that from their inception have focused on digital services enabled by the internet and related technologies, including mobile. It does not include traditional IT firms that rely on sales of hardware or software as their main source of revenue.)

And yet Western digital firms haven’t given up on trying to tap into China’s rapidly growing market. Google is reentering China by setting up new offices and an AI center, signing new deals with retail heavyweights JD.com and Tencent, rolling out new products (including a controversial local mobile search app that would strictly censor results), and investing in promising local startups. Airbnb, LinkedIn, and WeWork are also expanding their presences in China. Amazon is expanding its China business in cross border e-commerce, Amazon Prime, and Amazon Web Services.

The question is, will this be sufficient? What could these firms do differently this time to succeed?

“Death by a Thousand Cuts”

Based on a comprehensive five-year study, my new research paper, published in the Academy of Management Discoveries this year, systematically identifies the reasons behind the failures of major Western digital firms in China. This study uses two rounds of interviewing to identify what the Nobel laureate Daniel Kahneman describes as the “inside view” and the “outside view” of the phenomenon.

First, interviews were conducted with 40 senior business executives from six leading Western digital firms (Google, Yahoo, eBay, Amazon, Groupon, and Uber) and their corresponding direct competitors in China (Baidu, Sohu, Taobao, JD.com, Meituan, and Didi). This was intended to identify the inside view of the phenomenon. The prevailing narrative emerging from these interviews points to a lack of strategic determination and patience by Western digital firms as the main cause of their failure. This is reflected in seven factors:

lack of a deep (enough) understanding of the Chinese market

poor management of relations with Chinese regulators and the government

ill-fated attempts to impose global business models unsuited to the Chinese market

failure to cope with the extremely fierce competition in China

failure to manage relations effectively with local business partners

imposing technological platforms developed for the U.S. market on China

overly centralized organizational structure’s leading to slow decision making

Second, 185 seasoned expert observers were interviewed in China to identify the outside view on the phenomenon. These interviews highlighted the failure by Western digital firms to acclimate to China’s business environment as the main cause of their failure. This was described in Chinese as Bujie diqi (不接地气), meaning these firms failed to “keep their feet firmly on the ground.” It led to a series of competitive disadvantages, thereby allowing Chinese digital firms to race ahead in the fight for market share. Specific factors identified included:

failure to cope with a very large number of local competitors

failure to cope with extremely aggressive and determined local competitors

underestimating the major differences between digital business and other industries

failure to develop and communicate business strategies effectively

ineffective innovation strategies

failure to fully embed operations in China

Despite the differences between the inside view and the outside view, these factors have converged in three clusters: (1) poor understanding of the business environment, (2) ineffective strategy making and communication, and (3) underperformance in operation and execution. The Western firms’ failures in China were not due to one specific factor, but rather to the cumulative effects of multiple factors over time. “It’s death by a thousand cuts!” remarked a former senior executive from eBay.

To date, Western digital firms have failed to capitalize on their perceived competitive advantage in China. They have failed to understand the complex business environment there, adapt their strategies and business models to the Chinese market, and develop new technologies and services to cater to the preferences of Chinese users. They have underestimated the strength and resilience of Chinese competitors and the enormous challenges involved when trying to dominate the largest digital market in the world. Their successes in other international markets have given them a false sense of safety and invincibility in their perceived competitive advantages.

While Western multinationals from other sectors benefit from advanced technologies, established product lines, and global supply chains that may take Chinese firms years of investment to catch up to, digital firms do not. They operate in an environment where the barriers to entry are relatively low and the focus of competition is on product and business model innovations and service delivery, rather than the most advanced technologies.

Can They Get Back in the Game?

Are Western digital firms forever doomed to fail in the Chinese market? The answer, of course, is no. The problems are not insurmountable, but the size and dynamism of the Chinese digital market suggest that any solutions that focus only on those problems are unlikely to be sufficient. The competitive advantages that have served Western digital firms well in other countries need to be recalibrated for the Chinese market. Three lessons here are particularly important.

1. Doing everything right is not enough. China has huge geographical disparities and socioeconomic variations across its regions. Its institutional environment and market preferences evolve rapidly and sometimes even erratically. Dominating and maintaining dominance in China poses unique challenges. Unlike other digital markets, doing everything right in China is often not enough to guarantee success, due to strong competition.

Take Uber. Before entering China, Uber senior leaders did their homework carefully to avoid the mistakes that had derailed many other (digital and not) multinational firms. Uber set up a highly autonomous Chinese subsidiary; partnered with China’s largest search engine, Baidu; committed significant capital and paid out $2 billion in subsidies to win market share; and offered services specially tailored to the Chinese market. Uber’s founder and CEO at the time, Travis Kalanick, took a hands-on role and spent over 20% of his time in China.

Despite all this, Uber wound up retreating from the Chinese market. What went wrong? It is hard to pinpoint any individual failure on Uber’s part. One notable challenge, however, is that for the first time, Uber met a genuine competitor: Didi Chuxing, which was more determined, had a larger cash reserve, and focused exclusively on China at that time. Uber sold its operation to Didi Chuxing. This case suggests that simply addressing each of the known mistakes made by other multinationals in the past is often not enough to guarantee success in the future. A more holistic approach is needed.

2. Accumulating incremental advantages in the “winner takes all” digital market. While radical innovations in products, business models, and technologies capture the most headlines, due to their importance to the long-term competitiveness of digital firms, what’s often overlooked is that accumulating incremental advantages across different areas of competition over time is also essential for survival.

The digital market is significantly different from other market sectors. Western digital firms had only a short history to establish any inimitable advantages. The focus of digital firms on product and business model innovations, and the relatively low technological entry barriers, allowed a very large number of Chinese competitors to appear. As a culture market, China favors native firms, as they are often better at understanding users and the business environment. Local firms are also more adept at managing relationships with regulatory bodies and thereby influencing and anticipating regulatory changes. The technologies and intellectual property that Western digital firms rely on are often easily imitated and then adapted to local tastes in the digital space.

In the “winner takes all” digital market, where usually only one or two players survive in each market niche, incremental advantages can snowball and have increasing returns to scale. The cumulative effect from any such advantage can become what separates winners from losers.

3. Experimental approaches to strategy and innovation. The enormous uncertainties in the rapidly evolving digital markets call for experimental approaches to both strategy and innovation. New ideas can become obsolete before they are fully implemented, requiring frequent recalibration of the course and destination of business strategy. Innovation through experimentation and improvisation is vital for success. But such experimental approaches are only feasible with strong autonomy by local management, local product and technical teams, and, in many cases, business models tailor-made for the Chinese market.

Winning in the New Digital Economy

Western digital businesses have not given up on China. However, to get back in the game and win, Western digital firms need to bring forward genuine competitive advantages. In addition to customizing their products, platforms, and business models for China, and empowering local management teams to compete for market share, these firms must also learn from Chinese digital firms how to integrate online and offline operations and build new partnerships and ecosystems.

As the digital market in China continues to expand rapidly, a growing number of digital startups have joined the ranks of the largest unicorns in the world. And as Chinese digital firms grow larger and more confident, they are actively pursuing new opportunities in other international markets — India, Southeast Asia, Africa, Europe, and even the U.S. So the clashes between Western and Chinese digital firms will continue to escalate both in China and internationally.

Beyond digital businesses, similar patterns have been observed in cloud services, mobile communications, fintech, and several non-digital sectors (such as solar energy, electric cars, and high-speed trains). Further, new battle lines have been drawn between Western and Chinese firms for artificial intelligence, driverless vehicles, and industries where Western multinationals have traditionally held major technological advantages (say, pharmaceuticals). The ongoing trade dispute between the U.S. and China is likely to further complicate the situation.

To capture a slice of the Chinese market, Western business leaders must recognize and understand the issues highlighted here. These lessons are relevant to more than Western digital businesses in China; they can also shed light on the future competition between Western and Chinese multinationals in other sectors and other international markets.