Strategies for Competing in a Changed China

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Strategies for Competing in a Changed China
Magazine: Summer 2004Research Feature July 15, 2004 Peter Williamson and Ming Zeng This paper presents the results of the authors’ detailed research into competition between multinationals and local Chinese companies in 10 industries over the past five years. They conclude that local companies are now threatening multinationals’ plans to conquer the China market. They analyse this new competitive game in terms of a dynamic battle of competencies. Multinationals start off with better industry-specific technology and know-how, and a higher level of competence in key functions like marketing and financial management. Chinese companies enjoy a better understanding of the local market, lower overhead, higher flexibility and the ability to buy technologies and expertise in an increasingly open global market. Who wins the competitive battle in an industry is determined by which group matches the competence advantage of their rivals more quickly and efficiently. They argue that to come out ahead, multinationals will need to fundamentally revise their China strategies, for example, by expanding market coverage, dramatically lowering costs, streamlining distribution channels, localizing R&D and proactively driving industry consolidation.

The night before China’s entry into the World Trade Organization in December 2001, Motorola Inc. held its global board meeting in Beijing for the second time and announced an ambitious plan to increase investment, revenue and sourcing by $10 billion each in China over the next five years. Other companies have had similarly grand visions. Telefon AB L.M. Ericsson announced that it would more than double its investment in China to $5.1 billion, also over a five-year period. General Motors Corp.’s plans call for Chinese operations to generate more than $3 billion of revenue by 2008. By that same year, Bayer AG intends to have the second phase of its $3.1 billion production facility up and running to meet forecasted growth in its China sales. These represent just a handful of the thousands of multinationals that have ambitious growth in revenues from China etched into their strategic plans. As China’s accession to the WTO gradually opens new markets and as its growth continues at better than 9% per year, even those that have long resisted China’s temptations are jumping in. Experienced multinationals are aware of the many challenges they must overcome, summed up by the old adage that in China “everything is possible, but nothing is easy.” Learning from the experience of pioneering companies, savvy investors know they have to contend with a minefield of competing local interests, overloaded infrastructure, difficulties in retaining skilled people, tortuous supply chains, unfamiliar local HR practices and communication barriers.1 But few predicted what is fast becoming the most formidable obstacle to success: the emergence of tough competition from local Chinese players. A decade ago, the possibility that Chinese companies would pose a serious competitive challenge to multinationals looked improbable. It wasn’t surprising, therefore, that, in 1995, just a few years after China’s personal-computer market opened up to foreigners, The Economist predicted that by 2000, multinationals would have captured an 80% market share from their hapless Chinese competitors. And it appeared that this prediction would be on target, as multinationals like IBM, Hewlett-Packard and Compaq quickly won more than 50% of the market. But the 80% figure was never reached — in fact, the numbers went in the opposite direction. Just one year after The Economist’s confident pronouncement, the Chinese company Legend Group Ltd. (known as Lenovo Group Ltd. outside China) became the No. 1 PC supplier in China. By 2000, Legend had 29% of the desktop PC market, and two other local players were at No. 2 and No. 3 with a combined 14% of the market. Legend maintains that lead today, with a market...
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