The emergence of hypercompetitive Chinese companies over the past decade in industries from telecom equipment to solar panels has been a game-changing development in global business. Western incumbents that blithely dismissed Chinese upstarts as imitators capable only of selling low-end, low-tech products soon found themselves fighting for survival in their home fields. Now a new and bigger wave of Chinese challengers is about to hit the world scene and disrupt sectors as diverse as construction equipment, machine tools, auto parts, trucks, medical devices, and even nuclear power. Multinational companies need to change their perceptions of these Chinese challengers and start to address the potential threat.
One perception that must change is that the only advantage of Chinese products is that they are cheap. The real Chinese edge is a constant push for cost innovation. For Chinese companies, innovation is not always about achieving technological breakthroughs. It is about being competitive on price and delivering value for money.
Cost innovation can involve little more than improving the efficiency of a production line, removing nonessential features, or using alternative materials. The products of Chinese cost innovators may lack advanced technologies and a lot of bells and whistles. But the value-for-money approach of these companies gives them a huge edge in the fast-growing market for products that are good enough to meet their customers’ needs. Some Chinese cost innovators go on to disrupt entire markets with their low-cost business models.
There is no magic behind the emergence of the Chinese challengers. They start in geographic markets that are more price sensitive and in product segments that are relatively less technology intensive than those of Western incumbents. They then create the capabilities to go global. The final stage is to confront the incumbents in developed markets and more sophisticated product segments. The best time to counter the threat of the Chinese challengers is when they are still fostering these capabilities. Never wait until the direct competition begins.