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:
- Ignore the risk and avoid competing in China’s mid-market
altogether.
- Offer global products and wait until China catches up to
more upscale demand, which works only for a limited number of sectors.
- 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.
