MNC supply chains

While some research has focused on corporations that have made use of a "beachhead" approach, other corporations use different expansion methods that align with their corporate strategies. For instance, Quelch and Gabilondo identified fast-food retailers such as KFC and McDonalds, which use a "penetrate" strategy that focuses on expanding quickly and comprehensively throughout China. This strategy allows the fast-food retailers to generate a first-mover and low-cost competitive advantage through scale.

Quelch and Gabilondo also cite retailers, such as Ermenegildo Zegna, that may already have channels in place across the country from their manufacturing processes and directly adopt a "disperse" strategy to leverage this network. Lastly, the researchers identify multinational retailers that decide to expand extensively within Tier 1 cities and not look outward toward Tier 2 cities for growth. Starbucks, for example, has executed a "focus" strategy that centers its expansion on deepening market penetration in Tier 1 cities, perhaps recognizing that Tier 2 markets may not be ready to adopt its products.

Direct control of its China operations is central to Coach's current strategy of pushing further into China. However, direct control also requires greater responsibility and management attention. Speaking to the unique needs of the market, the company has partnered with local market research groups to determine the right product mix for its customers in China. For example, Chinese consumers seem to prefer conspicuous brand markings in apparel and accessories products, leading management to tailor different products for the local market. The question of whether, and how, to link up with a local partner -- one that not only understands the Chinese market, but also has the necessary local connections to an area's business leaders and government -- is equally integral to a multinational's success in Tier 2 cities. Given the juxtaposition of China's relationship-based business culture (i.e., guanxi) with the complex approval process for any retail project, multinational corporations emphasize the importance of securing local partners in targeted Tier 2 or Tier 3 cities.

The overarching partner and guide it seems, however, is the government. A prominent Shanghai-based private equity investor affirmed that, above all, investors must heed the motto "follow the government" if they want to succeed in China, while Poulin confirmed that this is "the first rule here [in China]." The Chinese central government and the local governments, to an even larger extent, play an essential role in guiding the direction of urban development.

Most importantly, he believes that mall failures are destined to continue because "the retail chain-store industry in China is years away from having the critical mass to fill megamalls, but developers don't understand that bigger is not better, that they need to account for smaller numbers of stores," particularly in Tier 2 cities. Even as professional mall developers such as CapitaLand, Swire, and Ivanhoe Cambridge build viable mall projects in Tier 2 cities, "the pace of change is very slow because easy credit continues to support poorly conceived projects," says Groves.