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 / Summer 2012 / Issue 67(originally published by Booz & Company)


China’s Mid-Market Innovators

A new category of competitor — low-price, medium-quality Chinese B2B upstarts — is shaking up the global competitive landscape.

China’s largest maker of medical equipment is Mindray Medical International Ltd. Based in Shenzhen, the company was founded in 1991 to serve Chinese hospitals, which, especially in rural areas, could not afford many basic medical devices. From its earliest years as a maker of in vitro diagnostic processes and patient monitoring and life-support systems, this Chinese business-to-business (B2B) enterprise strove for a basic level of acceptable quality and versatility, and a high level of innovation: The company has consistently reinvested about 10 percent of its revenue in R&D every year. As China’s economy expanded in the 2000s, Mindray’s ambitions grew accordingly; it competed with increasing success in the global medical devices market, rapidly gaining market share by offering monitoring and medical imaging systems at prices that were typically 40 percent lower than those of most incumbents.

In 2008, Mindray bought the patient monitoring division of the Datascope Corporation (based in New Jersey) for US$209 million. By 2010, the now-global enterprise had businesses in 140 countries, annual revenues of more than $700 million, and a portfolio of products approved by the U.S. Food and Drug Administration and other Western regulatory bodies. Mindray’s expansion “is part of our long-term strategy to compete in the most sophisticated markets in the world,” said Xu Hang, the company’s chairman and co-CEO. Not bad for a company that began as a low-cost producer in an underserved Chinese B2B sector.

Another such company is Shanghai Electric Group, a maker of power generation, transmission, and distribution equipment, along with heavy machinery and public transportation vehicles. Founded in the 19th century, it established itself in the 2000s as a global player in the energy and construction equipment industry. Shanghai Electric’s status as a state-owned company gave it access to China’s domestic market, but the company also developed capabilities for producing reliable, low-priced equipment around the world. In 2010, for example, the company reached a $10 billion agreement to supply India’s Reliance Power with coal-fired generators.

Mindray and Shanghai Electric are examples of a new type of industrial company emerging primarily in China. We call them mid-market innovators, after the burgeoning middle market of Chinese urban and rural businesses and government offices, which were their original core customers. Some mid-market innovators are privately held companies; others are state-owned. They are all in intense competition, often with one another, which forces them to be frugal, nimble, and responsive. They sell to customers who have many choices but who also have their own hypercompetitive pressures, and they are rapidly moving from their Chinese B2B context out into the global economic landscape.

A Challenge to Incumbents

The emergence of mid-market innovators is a game-changing disruptive force. They are rapidly reshaping the dynamics of many industries — including agriculture, construction, healthcare, and transportation — but many competitors are still largely unaware that they exist. In aggregate, however, mid-market innovators represent the next stage in China’s transition to becoming a global economic superpower — and a major potential threat to well-established global manufacturers, one that could jeopardize their existence. This may sound overdramatic, but the possibility is real. Incumbents in capital- and scale-intensive B2B industries, in which consumer branding isn’t important, are particularly vulnerable.

Similar companies could conceivably emerge in other markets, such as India, Brazil, or Indonesia, but they haven’t. They are, so far at least, largely Chinese. That’s because of the unique characteristics of the Chinese business environment right now: the enormous size and complexity of its customer base, its fiercely competitive companies and rapid-fire innovation culture, its access to low-cost labor, its distinctive regulatory environment (balancing openness and control), and its explosive growth in infrastructure and public services. All of these combine to give mid-market innovators an immense platform for growth, protected from outside competitors, which don’t have much access to that Chinese business environment or experience with it.

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