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,
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.
We are in the midst of an economic revolution: a shift of the global center of gravity of economic strength towards the east, which is fundamentally reshaping the competitive landscape of numerous industries. As an economic bellwether, the ...