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


China’s Mid-Market Innovators

Three Challenging Strategies

Many large multinationals have been slow to recognize this threat. To a global organization headquartered in the U.S. or Europe receiving information through the filter of its local Chinese sales organization, the emerging mid-market competitors are barely visible. Many incumbents are also held back by their view of China’s billions of new urban consumers as an increasingly important source of demand for their products. (See “Competing for the Global Middle Class,” by Edward Tse, Bill Russo, and Ronald Haddock, s+b, Autumn 2011.) The mid-market innovators tend to avoid the consumer sectors, where competition is intense and profits are thin, even by their standards.

Even when global companies recognize the threat, many of them find it difficult to respond appropriately. They assume, incorrectly, that they have a great deal of time to adapt, and that their own products will hold steady as the Chinese market matures. Three of the most popular strategies for incumbents stem from this assumption, and these strategies have, by and large, led to poor results.

The first strategy is to ignore the risk and avoid competing in China altogether. But China’s mid-market is large enough to allow local innovators to use it to gain proficiency — and rapidly bring their capabilities and low prices to the incumbents’ traditional space, as Sany did.

The second popular strategy is to continue offering global products in China, waiting for emerging markets to catch up to premium demand. For example, a Western construction equipment maker might position itself to sell higher-priced vehicles in China — assuming that sooner or later, subcontractors there will gain scale and access to long-term financing, and start to buy more expensive, longer-lasting, higher-quality products. But that day is unlikely to come anytime soon. Even as China becomes a major luxury goods market, interest in “Mercedes quality” products will not extend to earthmovers, windmills, and medical devices, not even with the promise of greater durability. With its modest barriers to entry at the lower end of the price spectrum, China will always have a tendency toward excess capacity and price-based competition.

Finally, there’s the “good enough” strategy, popularized by Bain & Company chairman Orit Gadiesh and her partners Philip Leung and Till Vestring. (See “The Battle for China’s Good-Enough Market,” Harvard Business Review, September 2007.) Companies that follow this strategy remain focused on the upper tier while producing a lower-priced brand considered “good enough” for mid-market customers. They reduce costs for the value brand by stripping out functions or features, being careful not to cannibalize the existing premium product line. In effect, this means running two distinct business models, each serving a different market segment. One straightforward way of doing this is to buy a local competitor or work in partnership with a local firm whose brand name can be used for lower-tier products.

For example, German truck manufacturer 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.

The two-tiered strategy, with separate but parallel business models, can be effective; it is certainly better than ignoring the mid-market entirely, and it enables companies to compete in mid-markets where they otherwise could not. But it is extremely difficult to get right. Marketing two brands is inherently more complex and expensive than marketing one; it can lead companies to duplicate resources and to create an incoherent web of joint ventures and other partnerships, which may be difficult to unravel later.

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