A new category of competitor — low-price, medium-quality Chinese B2B upstarts — is shaking up the global competitive landscape. Many large multinationals have been slow to recognize this threat and find it difficult to respond appropriately. (An excerpt from an article in S+B by Edward Tse, John Jullens and Bill Russo).
Mindray and Shanghai Electric are examples of a new type of industrial company emerging primarily in China. We call them mid-market innovators, after the burgeoning middle market of Chinese urban and rural businesses and government offices, which were their original core customers. Some mid-market innovators are privately held companies; others are state-owned. They are all in intense competition, often with one another, which forces them to be frugal, nimble, and responsive. They sell to customers who have many choices but who also have their own hypercompetitive pressures, and they are rapidly moving from their Chinese B2B context out into the global economic landscape.
A Challenge to Incumbents
The emergence of mid-market innovators is a game-changing disruptive force. They are rapidly reshaping the dynamics of many industries — including agriculture, construction, healthcare, and transportation — but many competitors are still largely unaware that they exist. In aggregate, however, mid-market innovators represent the next stage in China’s transition to becoming a global economic superpower — and a major potential threat to well-established global manufacturers, one that could jeopardize their existence.
Thousands of new mid-market customers emerge every year in newly developed cities such as those in the Chinese interior or those formed on the edge of existing metropolitan regions. They tend to begin as domestic players, selling to Chinese industrial customers who are looking for goods and services that offer a fair level of functionality and quality at a relatively low price compared with most imports. For example, these companies do not target all parts of the country at once; instead, they recognize that different regions are developing at different rates, and they concentrate on the regions that are ready for their particular level of low-cost product.
Some Chinese customers who buy from mid-market innovators today will eventually reach a point at which they can afford more reliable equipment with more features. Global companies will be eager to sell it to them. But by then the mid-market innovators will have built long-standing relationships with those Chinese customers — and their counterparts in India, Latin America, Indonesia, Africa, the Middle East, and other countries and regions around the world. Moreover, the financial crisis and resulting pressures on government spending have led to increased demand for low-priced, high-quality tools, devices, construction equipment, and machines of all kinds — making Chinese industrial products competitive even in established markets like Germany and the United States.
Three Challenging Strategies
Many large multinationals have been slow to recognize this threat. To a global organization headquartered in the U.S. or Europe receiving information through the filter of its local Chinese sales organization, the emerging mid-market competitors are barely visible.
Even when global companies recognize the threat, many of them find it difficult to respond appropriately. They assume, incorrectly, that they have a great deal of time to adapt, and that their own products will hold steady as the Chinese market matures. Three of the most popular strategies for incumbents stem from this assumption, and these strategies have, by and large, led to poor results.
The first strategy is to ignore the risk and avoid competing in China altogether. But China’s mid-market is large enough to allow local innovators to use it to gain proficiency — and rapidly bring their capabilities and low prices to the incumbents’ traditional space.
The second popular strategy is to continue offering global products in China, waiting for emerging markets to catch up to premium demand. For example, a Western construction equipment maker might position itself to sell higher-priced vehicles in China — assuming that sooner or later, subcontractors there will gain scale and access to long-term financing, and start to buy more expensive, longer-lasting, higher-quality products. But that day is unlikely to come anytime soon.
Finally, there’s the “good enough” strategy. Companies that follow this strategy remain focused on the upper tier while producing a lower-priced brand considered “good enough” for mid-market customers. They reduce costs for the value brand by stripping out functions or features, being careful not to cannibalize the existing premium product line.
A small number of global companies, seeing the challenge of mid-market innovators facing them, have taken on this kind of comprehensive approach to change. They are focusing on developing low-price, as opposed to low-cost, products. They do this by creating an integrated capabilities system that approaches Chinese mid-market customers and Western higher-end customers as one market, with one group of products. This cannot be done overnight; it requires a relentless focus on improving operations and product development together with regional integration.
Global companies are also more experienced with localization, adapting global products to meet the varying needs of different markets. Sometimes this can result in simple products of the “good enough” variety. But many companies have learned that value in adaptation need not come from stripping out functionality. Rather, the key is offering market-relevant features at a lower price. A footprint with local innovation can allow companies to tailor product development “in country, for country”; they can use global resources when appropriate, but design products to meet local conditions and delight local customers.
To many global incumbents, the threat of mid-market innovators seems remote. But if the trends continue in a plausible fashion, they could move to center stage. If and when that happens, global incumbents will be forced to rethink their product portfolios, business models, staff skills, and ingrained mind-sets. They will have to stop thinking about what they can bring to China from elsewhere, and start focusing on what China’s mid-market can offer them. On the upside, this would allow major global companies to tap into the same large customer base, and to develop the same kind of entrepreneurial zeal that mid-market innovators are using right now to fuel their growth.
- Expat China (expatintelligence.com)
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- Doing Deals In China (techcrunch.com)