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Out Of Crisis Comes Opportunity
Our title for this article emerged from a recent client project. We were working with a major automotive parts manufacturer on growth strategy. Our client was a company with strong technology roots and market shares that ranged from “nice” to “mind-boggling”. We were completing a presentation to their executive team on growth priorities. In short, our final slide concluded that “For the next decade, more than all of the growth will come from the China market”. One of the members of the audience reacted that “While I don’t doubt that statement, our business is with the major automotive OEMs – GM, Volkswagen, Honda, etc. The China market may be important to us some day, but right now, we feel our focus has to be with these major customers.”
There was a pause, before we responded that “The conclusion we were presenting was about your major customers. Let’s go through them one by one. For [a certain OEM], sales will be down in North America and flat in Europe. Their only growth market is China. For [another OEM], they are losing share in all three of their established markets, with only China showing growth. … Our conclusion is that to grow your business with your major customers, you can only grow in China.”
Somewhat like what you observe in a football stadium in which the visiting team scores in the final seconds as the clock expires to win by one point, there was a period of stunned silence. The first two comments afterwards were not appropriate for a professional journal. The third comment (the first that was printable) was a question: “When are you going to get to the good news?” This article gets to the good news, which we characterize using the Chinese proverb in the title: Out of crisis comes opportunity.
For far too many companies in far too many industries, especially business-to-business suppliers serving manufacturing customers, the story above rings true. Established markets in North America, Europe, and Japan are often “soft”, with many of them seeing volume declines as activity shifts to emerging markets, particularly China. We have worked with clients in numerous industries for which this overall outlook applies. It is in no way unique to the automotive market. There are two underlying reasons for this. One is the competitive advantages many firms (especially manufacturers) are finding in China as a result of low labor costs and a supportive business environment. The other reason – a more surprising one – is that the China market itself is booming, attracting businesses to the opportunity for profitable sales into a growth market. Like Willie Sutton’s advice to “Rob banks because that’s where the money is”, many businesses are focused on China because that’s where the customers are.
Willie provides the basis for responding to the earlier request for some good news: China is where your company’s growth will be, probably with your current customers and maybe also with some new customers. We believe that China represents attractive opportunity. It involves growth, and growth provides the foundations from which firms can reward their shareholders. Our perspective is that it is good news when any firm’s customers are growing, and that reality isn’t changed if the firm’s customers are growing in China.
This starting point allows the stunned silence of meetings such as we described above to evolve to excitement about the ways in which firms can realize the potential offered by the growth that is occurring in the China market. Another old saying seems to apply here: “No one ever said it would be easy.” In the following sections, we will offer three lessons that we have learned working with clients whose goal was to take advantage of the China growth opportunity available to them.
- Your major customer went to China for the same reason you are going to China. Growth. Growth. Growth. Not lower cost suppliers. Not to replace you. Not to drive down your prices. Well, maybe that’s not quite true. They may have originally gone to China for exactly those reasons. And probably that wasn’t a pleasant experience. But today, they are in China largely to serve the China market, and they will be making supplier choices for the exact same reasons that they made them in the U.S., Europe, or any other market. “Which supplier will make the greatest contribution to my ability to succeed against the competition?”
Having made that statement, we caution against premature celebration. In many developed markets, the supplier won their customer’s business on the basis of price. That will be true in some China market segments as well. But in other developed markets, suppliers have won by helping their customers succeed in different ways – through ingredients that helped them to gain share as a result of end customer preferences, through initiatives that helped to reduce overall cost via savings in labor or adjacent products, or through efforts that helped the customer to reach a higher price point along the spectrum of Good-Better-Best offerings. All these opportunities will exist in China as well.
We provide an analogy that works within the context of most major customer relationships. In such relationships, the supplier often sells numerous products and services into numerous major customer product lines or divisions across numerous regions. The basis for success often varies from one product to another, from one customer application to the next, from one region to the next. Each customer chain segment requires a separate strategy. The China market requires a China strategy. What are the ways in which the supplier can create value? What are the needs of the major customer vis-à-vis its customers and its competition? In fact, just as there are often multiple strategies in existing markets, there will probably be multiple strategies for success with a major customer in China. Therefore, step one on the path towards success with major customers in China is to do the homework – identify the target market segments, characterize them in terms of economics and critical success factors, and define the means by which the supplier can achieve positive differentiation from its competitors.
- It’s a square dance, not a rumba. In many supplier-customer relationships, it’s a two-party situation. For the automotive supplier we described in the earlier case study, we found the following. Two of its largest five global OEM customers had joint ventures with the same Chinese OEM. Two of the other global OEMs had relationships with other Chinese OEMs. Two of the three Chinese OEMs involved in these global relationships had existing relationships with a Chinese supplier. One of these Chinese suppliers had an existing joint venture relationship with a major global parts supplier. Without continuing, we can rest our case that all the ingredients are present for a successful square dance. And, like a square dance, for any two participants, sometimes they are partners, sometimes they are opposites. It’s complex, with enormous potential to “go bad” if one or more of the participants gets confused or forgets their roles and responsibilities. Such is the China market.
Unlike square dancing, there is, however, no caller, and one of the challenges of entering this market is to understand the rules and relationships. We encourage the development of careful “market maps” and of explicit initiatives to ensure that all participants understand and agree upon their roles and responsibilities. It is unlikely that any entrant into this market can succeed with out partners – and in fact even the rumba doesn’t allow going it alone.
There are numerous analogies to guide firms along the process of defining relationships and managing them towards success. None, however, is more important than the following: “If it’s not win-win, you won’t win”. We’ve found this to be true in traditional market relationships, for example those between manufacturers and their distributors, and we have numerous examples of why this is true in China. Our advice involves developing a careful understanding of each partner’s objectives and a sharp-pencil calculation as to what it will take to ensure that they too see a “win”. Like the need for segment-specific strategies, partner-specific assessments as to the value of a relationship are good business practices in China as in other markets.
- Just because it’s China doesn’t mean you start from zero. Far too often, companies with major customer relationships despair about the prospect of extending that relationship into China. We believe exactly the opposite is true. The reality is that “strategic customer” and “strategic supplier” are two sides of the same coin. There was a reason why your major customer made you a major supplier. At minimum, you begin with the advantages of “working with the devil you know…” and of one-stop shopping. But we think it goes well beyond those advantages.
In recent projects, we’ve done systematic assessments of numerous supplier-customer relationships. Among our findings:
- In one industry, we saw a doubling of the percentage of sales involving “global platforms”, foundations upon which country-specific products were developed and introduced.
- In another industry, we saw global outsourcing of certain business functions to suppliers, with economies of scale dictating that suppliers able to cover multiple geographies would win such contracts in all of the geographies they covered.
- In another industry, we identified local market brand preferences that favored “global brands” over local brands.
- In another industry, we found that local regulations were patterned after those in a developed market, favoring supplies already “certified” in that developed market.
The clever reader will guess that all four of the above examples involved the China market – four case studies of the ways in which the basis of a supplier’s business relationship with a major customer could be exported into China.
“Truth in Advertising” rules apply here. In each of these four examples, we should hasten to point out that none of the other three considerations applied. In the case in which local regulations were patterned after those prevailing in other markets, there were no meaningful “platforms’, the economics were entirely dictated by local market considerations, and brands were invisible beyond the major customer relationship. But, often there are factors that create an advantage for a major supplier, allowing it to extent its relationship into the China market. We encourage a systematic examination of the basis of relationship successes and their portability into new market segments, whether they are in China or elsewhere.
We offer these three ideas as ways in which firms can translate crises – such as the realization that their major customers are focused on the China market – into opportunity. We believe that attention to these three ideas can enable firms to more successfully manage the complexity of the China market and translate activity in this market into profitable growth. There is great potential to the China market, and there even greater potential for those firms whose existing major customers are active in this market. The square dances of the China market open the potential for new relationships, some of which can be translated into second-stage growth opportunities. And firms that have been successful with their major customers get a head start against their competitors in China, and should be able to translate this head start into a win at the finish line. Out of crisis comes … the opportunity for hard work that can lead to … success stories and rewards from the China market.