Competing in the China Truck Market - Implications for Multi-National Corporations

March 1, 2013


by Bill Russo

This is the fourth installment in a series on the China Commercial Vehicles market.  

Click here to read the first installment.

Click here to read the second installment.

Click here to read the third installment.

China’s market size has been hyped to the point of cliché since the country first opened its doors to foreign investment.  By 2020, the China HD/MD truck market is expected to reach 1.7 million units sold per year.  As noted in an earlier article in this series, products positioned in the in the price range between 200K – 350K RMB account for 70% of total sales.  The companies positioned to sell to this rapidly expanding “mid-market” segment aim to address the needs of domestic customers looking for goods and services that offer “good enough” quality and value for the money. 

Sandwiched between the premium market and the bottom of the pyramid, lies the rapidly expanding global middle market --  a segment of business and retail customers that is rapidly gaining buying power, especially in emerging markets.  The middle market offers more than incremental customers and profits – it is a key competitive battleground. The winners here will likely be the leading companies of tomorrow.

Beneath the veneer of many middle market strategies ostensibly focused on incremental growth, the emerging markets are incubators for a wave of local companies that are trying to climb up the product-price pyramid to eventually emerge as global competitors.

Whatever the motivation for pursuing mid-market strategies with an increasingly global scope, the elements of offense and defense have become equal in importance.  In the spirit of the Innovator’s Dilemma, written and popularized by Harvard’s Clayton M. Christenson[1], companies are adopting the mantra, ‘if I don’t do it to myself, someone else will do it to me.’  The dilemma of introducing fit-for-purpose, but lower priced products in the home markets of multi-national corporations has challenged the conventional business logic of pursuing projects with ever-higher return on investment.  However, succeeding in the rapidly expanding mid-market will certainly trump having an emerging-market competitor do it before you.

Mid-market form

The underlying reason for the emergence of mid-market players in China is the nature of the country’s economic growth. For many industries, China’s product market segmentation has become very diverse, typically far more than MNCs’ home countries.  In many countries, the market pyramid has a small top wedge, a modest middle slice and large base.  But in some others, the lower tier is smaller, the top is growing but still relatively small, and much of the expansion is coming in a bulging middle.  Whatever its size, this middle tier is the natural home base for many of the best Chinese companies. Here is where they find the opportunities best aligned with their strengths.

However, of most importance is that while winning in the mid-market will determine the fate of many companies within China, China’s mid-market impact will be felt far beyond the country’s borders, as some of the more prescient multinational companies have started to realize.  The Chinese companies emerging in this space will gain access to enormous scale advantages. Any profits they make will be reinvested, allowing them to move both up the value chain, and eventually out of the country to the international markets.

Breeding ground

The importance of China’s mid-market stems from the fact that this is where Chinese companies are establishing themselves. China’s domestic HD/MD manufacturers already command more than 90% share of the market for commercial trucks, and virtually all of the low-end market.  Having locked in this business, market leaders including CNHTC, FAW, DFM, BAIC and SAIC are in the process of acquiring capabilities that allow them to address the expanding mid-market.  Developing a highly adaptive and good-enough mid-market product offering is the pathway for such companies to win in China as well as expand beyond China.

They know they cannot enter at the top end of the market for most goods – in almost every industry; their products are not good enough to take on multinationals head-to-head.  They also know that while the bottom tier is perhaps their most natural home, such is the rate of China’s economic growth that this segment – however big it may be today – can only shrink, and at a rapid rate, over the next few years. Companies that want to grow must therefore address the middle tiers.

This is where their range of advantages can be brought to bear. Domestic businesses have – and will continue to have – privileged access to this tier. Not only will they be better positioned to offer strong value propositions, but they will also be better prepared to overcome the structural impediments that will prevent the rapid adoption of global business models in sectors such as construction and agriculture.

The size and diversity of China has created very complex market segmentation.  Regions are developing at different rates, with differing amounts of access to other markets both within the country and overseas. While this diversity will not last for ever, the transition stage the country has already entered will persist for many years to come – far longer than in other emerging markets, such as those of Japan, South Korea and Taiwan.  Here they will be able to temper themselves and build scale.

The major new companies that emerge from this breeding ground – some private, others state-owned – will be some of the most disruptive forces in Chinese business. Subject to intense competition from other mid-market firms, and selling to customers who themselves are constrained by competition, these businesses are both frugal and focused. From their mid-market bases, the best of them can build scale, add capabilities, and start to encroach on turf that multinationals have long regarded as their own.

For local players in the emerging markets, a mid-market strategy can be quite challenging, since local brands frequently incur greater pricing risk when delivering higher contented products into the market.  This is for a couple of reasons.  First, when the local product’s brand image does not naturally carry the price points required to support feature-rich products, these products are at risk of having to be discounted. Second, local companies are typically less accustomed to managing the complexity entailed in feature rich products, introducing the risks of cost-creep.  Overcoming such challenges is key to the development of the next generation of global competitors.

Many Multinationals assume that they just have to hold on until the Chinese market is mature enough to afford their products. But by that time these mid-market innovators will have built long-lasting relationships with their Chinese clients, and will have narrowed the gap between themselves and their global competitors.   Sany, who became the world-largest concrete pump manufacturer and who has recently acquired the second largest producer (Germany’s Putzmeister), is an example of this new breed of global players.

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[1] Clayton M. Christenson, The Innovator’s Dilemma (Harper Business: 1997)