Competing in the China Truck Market - Winning in China's Mid-Market

April 1, 2013

by Bill Russo

This is the fifth 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.

Click here to read the fourth installment.

Most multi-national companies that aspire to be global leaders have no choice but to find a way to win in the Chinese mid-market. 

The common strategies employed by MNCs are to:

1. Ignore the risk and avoid competing in China’s mid-market altogether.
2. Offer global products and wait until China catches up to more upscale demand, which works only for a limited number of sectors.
3. Pursue a two-tier strategy with a core brand sold along with a lower-priced “good enough” brand considered. MAN is following this approach since early 2011 and Daimler trucks are considering it with their partner Foton.

Multinationals simply cannot afford to cede this mid-market to local competitors.  Instead, they must set about organizing themselves to face the emerging Chinese competitors on their own terms – with products that meet Chinese

needs, developed at Chinese cost, and which can then be taken out of China to other markets around the world. They must stop thinking about what it is they can bring to China, and instead start focusing on what China’s mid-market can offer them – what culture and structures they must adopt that will allow them to innovate at a lower cost and to deliver the goods and services that will drive the next round of global growth.

A good example can be found in the construction equipment industry. Caterpillar, which in the 1990s focused on government relationships and selling traditional, high end products to China, shifted focus after the entry of Japanese and Korean competitors in the mid-market segments, and being squeezed by lower-end local players. In the late 2000’s, Caterpillar acquired Shandong Engineering Machinery and formed local R&D centers to expand into lower end market, while optimizing its cost base to compete. Clearly, Caterpillar reasoned, there was a market segment that was here to stay and CAT’s traditional product and business model positioning wasn’t going to be adequate.

In the medical equipment sector, another good example of a mid-market innovation was General Electric’s development of ultrasound machines. From 1990 to 2000, GE served the Chinese ultrasound market with machines developed in the US and Japan, priced at $100K and upwards. While these products were successful with a narrow set of hospitals, the price point was above the affordability threshold of many. In 2002, GE’s local team in China leveraged GE global resources to develop a cheaper, portable machine, priced at $30-40K. And then in 2007, GE’s local, China organization launched a dramatically cheaper model, priced at only $15K. The result of these step-wise innovations in somewhat functionality but at dramatically lower price points, were products that saw rapidly increasing sales in China from $4M in 2002 to $278M in 2008, and at the same time, these mid-market products found new markets abroad. As it turned out, there had been latent demand for lower-priced ultrasound machines even in the world’s most developed markets, but neither GE nor its competitors had realized this or pursued this demand with relevant products.

Mid-market products are not simply lower-cost variants to global, high end products that can be delivered at lower price points.  Foreign and Chinese companies will bring very different mindsets into the battle for the middle market.

Although the competitive strategy to address the middle markets may be different, the path for both Chinese and foreign companies is the same: access the middle market growth opportunity to both extend brands and product reach with the magnitude of impact that can change the global competitive landscape.    

Ultimately, mid-market capabilities rooted in China can be leveraged to tap global markets with similar demand patterns.  

While the size and importance of the Chinese mid-market opportunity may be understood, it is often unclear how Multinationals can participate in the market.  The Chinese market is already highly fragmented, and the pathway to entry for foreign players is not obvious.  However, we believe that several market entry options exist.  It is important to understand that competing in Chinas rapidly expanding and highly competitive mid-market will require an integrated set of capabilities.

For example, MAN SE (Maschinenfabrik Augsburg-Nürnberg), in a joint venture with China’s Sinotruk, has maintained a two-tiered strategy since early 2011.  Vehicles for the Chinese market are sold under the Shandeka brand name, and those for other emerging markets across Asia, Africa, and the Middle East are sold as Sitrak.  This strategy allows MAN to sell two different vehicles at two different price points to two different markets, with separate business models.

In China’s passenger vehicle market, similar two-tiered strategies are increasingly adopted by international OEMs in the form of Joint Venture local brand development.  Starting with the Everus brand launch by Guangzhou Honda in 2010, Shanghai GM Wuling, Dongfeng Nissan, and Dongfeng Honda have each launched their respective JV local brands.  The vehicles carrying those brands are often originally branded vehicles at the end of their life cycle, which are rebranded after certain local adaptations are made to meet the taste of the Chinese consumer.  Such an approach is intended to generate higher volume through upgraded old generation vehicles without diluting the brand image of international players.

The two-tiered strategy, with separate but parallel business models, can be effective:  it enables companies to compete in mid-markets where they otherwise could not.  However, it is not a trivial task for many global producers of industrial equipment to build the capabilities needed to sell effectively to mid-market customers in China.  They must invest in Chinese (or equivalent) R&D and product development, simultaneously integrating their new operations with their old and managing intellectual property challenges. They also lack the home advantages that Chinese mid-market innovators possess: the knowledge of their market niche, access to low-cost production resources, and a deep understanding of the regulatory and operational environment.  Joint ventures such as MAN’s can help, but they also add complexity.

A small number of global companies are focusing on developing an integrated capabilities system that approaches Chinese mid-market customers and Western higher-end customers in an integrated way.  This requires a relentless focus on improving operations and product development together with regional integration.  For example, a company might migrate more parts of its value chain and innovation practices to China and other lower-cost countries — with the intent not of saving labor costs, but of gaining distinctive production and sourcing capabilities that can be put in place around the world. These new efforts can specifically target the country’s mid-market and use local engineers and research staff accustomed to more frugal ways of thinking.  It may not be obvious at first how particular product lines will be affected, but the new efforts can act as springboards for the kinds of ventures that lead to capabilities that can be leveraged around the world[1].

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[1] Edward Tse, John Jullens and Bill Russo, “China’s Mid Market Innovators”, Strategy & Business, Summer 2012, Issue 67.