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 / Autumn 2011 / Issue 64(originally published by Booz & Company)


Competing for the Global Middle Class

The same three types of competitors — local upstarts, global aspirants, and multinational incumbents — are active in China’s construction equipment market, probably the most vibrant construction equipment market in the world right now. Local upstarts such as Zoomlion and Longking have been moving into the domestic middle-class market in China. Some, like the LiuGong Machinery Corporation and Sany Heavy Industry, have become global aspirants. In 2008, LiuGong opened a factory in India. In 2009, Sany announced it would invest €100 million ($144 million) in an R&D and manufacturing center in Germany; it also has major plants under construction in the U.S. and Brazil.

Incumbent construction equipment makers, such as South Korea’s Doosan Infracore, Japan’s Komatsu, and U.S.-based Caterpillar, are aggressively targeting the Chinese middle market as well. Caterpillar’s stated goal is to become the top brand in its sector in China by 2015. In the 1990s, the company was focused on developing government relationships to facilitate sales of its existing product lines. But as the middle market heated up, Caterpillar found its market share squeezed by Japanese and Korean competitors and rising local players. In the late 2000s, Caterpillar’s leaders recognized that the company’s traditional product line and business model were not adequate for China. It lowered its cost base through the establishment of local R&D centers and through the acquisition of Shandong Engineering Machinery, a leading Chinese wheel loader manufacturer.

Just as countries evolve over time, so do companies. Many of today’s local upstarts will be global aspirants tomorrow; today’s global aspirants often become multinational incumbents. The differences among them appear primarily in the way they choose to compete, and in the level of resources that they use to enter a market. The more intelligent they are about their approach, the more likely they are to move to the next level. Unfortunately for the incumbents, local companies are increasingly intelligent about the way they make the transition, using joint ventures or regional expansion to gain the experience they need to compete on a larger scale.

A More Complex Market

The world is far from homogeneous. The buying power, needs, and desires of the middle classes vary by nation and region. In developing nations, for example, middle-market customers are seeking products that have some of the premium features and quality that customers in developed nations are used to, but at lower price points. Furthermore, customers in each geographic market are drawn to buy products that fulfill local needs and desires. As Pankaj Ghemawat, professor of global strategy at IESE Business School, notes in World 3.0: Global Prosperity and How to Achieve It (Harvard Business Press, 2011), there are

numerous casual examples of cultural difference [in consumer products]…. The Czechs drink way more beer than people in Saudi Arabia, and even more than the Irish, who come in second. Pakistanis google sex more often than any other national population, just slightly more than the Vietnamese and far more than the Irish and Czechs. Eritreans google god the most as well as figuring in the top five nationalities searching for sex. India and China are so close geographically that they still haven’t resolved their territorial disputes, but couldn’t display more distinct food cultures, particularly around which animals and parts of animals should or shouldn’t be eaten. Argentines see psychotherapists more than other nationalities, and Brazilians spend a higher proportion of their income on beauty products than the citizens of any other major economy.

To successfully serve middle-market customers, companies must identify which product attributes the customers in a specific market value and don’t value. Then, they must either add those attributes to or cull them from their existing products. Ghemawat uses the examples of McDonald’s, KFC, and Coca-Cola, all of which vary their products geographically: Coke, for instance, uses cane sugar as sweetener in some countries and corn syrup in others. This type of variation adds complexity across product and marketing mixes, and in all the operations and functions related to them. It can require much extra expense and attention from companies, especially those with heavily centralized, scale-driven business models.

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  1. Pankaj Ghemawat, Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter (Harvard Business School Press, 2007): A highly effective approach to global strategy, one middle market at a time.
  2. Vijay Govindarajan, Jeffrey R. Immelt, and Chris Trimble, “How GE Is Disrupting Itself,” Harvard Business Review, October 2009: Describes reverse engineering in GE’s medical systems business.
  3. Ronald Haddock and John Jullens, “The Best Years of the Auto Industry Are Still to Come,” s+b, Summer 2009: The global middle-market opportunity in motor vehicles.
  4. Richard Shediac, Rainer Bernnat, Chadi Moujaes, and Mazen Ramsay Najjar, “New Demographics: Shaping a Prosperous Future as Countries Age”  (PDF), Booz & Company white paper, May 2011: The underlying dynamics that have created the global middle class.
  5. Edward Tse, The China Strategy: Harnessing the Power of the World’s Fastest-Growing Economy (Basic Books, 2010): How to successfully enter one of the largest global middle markets.
  6. For more on this topic, see the s+b website at:
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