Multinational companies that assume they can rely solely on technological innovation to fend off these challengers are likely to be in for a shock. The rise of the middle market, particularly in emerging markets, has changed the rules of the game. Middle-market consumers are driving the need for “good enough” products that emphasize price competitiveness and sufficient functionalities, rather than customization and the most advanced technologies.
In the competition for the global middle market, the odds favor Chinese cost innovators—particularly those with the advantages of scale, research and technology capabilities, and global ambitions. The following are some common features of their strategy for success.
Scale Advantage. Large production capacity enables some Chinese companies to enhance their global price edge despite rising domestic wages. In China, local manufacturers of wind-turbine and coal-power generating equipment have about a 25 percent cost advantage over multinationals. More than 40 percent of this cost gap is due to the scale effect. Labor costs account for only one-third of the savings in wind turbines and one-quarter of the savings in coal power equipment.
China’s huge domestic market accounts for much of this scale advantage. Chinese companies supply almost 90 percent of the domestic wind-turbine market, which accounts for more than one-third of global demand. China’s three biggest suppliers of coal power equipment also dominate the country’s domestic market, which at one time accounted for two-thirds of global demand.
Innovation for Cost Competitiveness. Many Chinese challengers are continually finding unconventional ways to economize through product design, production processes, or choice of materials. As a result of its continual R&D efforts, for example, the Chinese battery maker BYD reduced its raw-material costs for nickel-cadmium batteries by replacing expensive nickel plate with a cheaper substitute. One Chinese renewable-energy company outsources noncritical parts to local suppliers, which it gathers into a single industrial zone in order to lower capital expenditure and processing costs.
Innovation to Provide Value for Money. Simply being cheap is no longer enough. Many winning products of Chinese cost innovators strike the right balance among price, quality, and functions. Zhongxing Medical’s line-scanning direct digital radiography (DDR) machines, for example, are adequate only for the most routine and simple functions, such as chest scans. They cost only one-tenth as much as Western multifunction flat-panel DDR machines. Yet Zhongxing quickly captured half the Chinese market, forcing Western competitors to cut their prices or even withdraw from China.
Global Ambition. The huge Chinese market no longer satisfies the appetites of domestic corporate giants, which aim to be truly global leaders. For example, Beiqi Foton, a leading Chinese truck maker, introduced its ambitious “5+3+1” international growth strategy in 2011. The plan calls for the company to build its own value chains in the five major emerging markets of Russia, Brazil, India, Mexico, and Indonesia and to break into the three major developed markets of North America, Europe, and Northeast Asia—in addition to maintaining its leadership position in China. Guangdong Nuclear Power, which accounts for more than half of China’s installed nuclear capacity, also announced globalization as its strategic direction in 2011. The company has already expanded into such emerging markets as South Africa, Belarus, Ukraine, and Thailand. Guangdong Nuclear even bid jointly with the French giant Areva on the United Kingdom’s Horizon project, a plan to build 6 gigawatts of nuclear-power generation capacity in the U.K.
Fostering Capabilities to Challenge Incumbents. Chinese challengers are aggressively creating the product offerings and R&D, manufacturing, distribution, and branding capabilities needed to compete directly with multinationals around the world. Such Chinese construction companies as Sany, Zoomlion, and XCMG have been acquiring European competitors to gain technology and market access. Medical-device company Mindray is building a direct-sales team in the U.S. to target large hospitals with more customized products. Other Chinese companies have acquired well-known brands and adopted dual-brand strategies to penetrate different price segments. The acquisition of Volvo by Chinese automaker Geely illustrates this strategy. Geely, which is known as a maker of economy cars, is keeping Volvo as an independent brand for high-end vehicles.