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


China’s Mid-Market Innovators

Moreover, 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 to complexity and incoherence.

For global players, there are no easy solutions to the problem of competition from mid-market innovators. Instead of competing as they are, incumbents facing this existential crisis will have to reshape their entire business model, while remaining true to their own identity.

Integrated Capabilities

A small number of global companies, seeing the challenge of mid-market innovators facing them, have taken on this kind of comprehensive approach to change. They are focusing on developing low-price, as opposed to low-cost, products. They do this by creating an integrated capabilities system that approaches Chinese mid-market customers and Western higher-end customers as one market, with one group of products. This cannot be done overnight; it 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 practice to China and other lower-cost countries — with the intent not of saving labor costs, but of gaining distinctive production 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 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 global mid-market prowess.

Honeywell International Inc. has adopted this strategy; its active R&D centers in China are geared not just to products for the Chinese market, but to an integrated product line that can be sold worldwide. The company’s revenues from product innovations originating in China have grown at an average annual rate of more than 40 percent in recent years. General Motors Company has a similar approach, with 11 joint ventures, two wholly owned foreign enterprises, and more than 35,000 employees in China. Working closely with the SAIC Motor Corporation, a Chinese automaker, GM has successfully positioned its brands to suit the diverse needs of the Chinese passenger vehicle market.

If a company takes this type of approach, rather than offering products that are just good enough for particular markets, its goal is to create great products sold everywhere — with the right features, better durability, more rapid innovation, and lower prices. Such a company will develop a capabilities system that, in its sector, can create products with Mercedes-level quality and attractiveness, Toyota-level durability and margins, and Skoda-level prices. That might seem an unrealistic goal, but if incumbent multinationals don’t take it on now, they may find themselves facing former Chinese mid-market competitors who have learned how to do it successfully.

Global multinationals can tap strengths that their local upstart competitors don’t have. For example, incumbents already have the means to take products developed in China to other emerging markets. Distribution and marketing are other areas of competitive advantage. Most Chinese manufacturers remain centered on production; multinationals can harness their global experience in promotion and delivery to offset the better local knowledge of their domestic competitors. Finally, global incumbents can use their expertise in alliances and M&A to forge partnerships with other companies, in China and elsewhere, that make the most of their combined capabilities and aspirations in creating a single line of products.

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