Second Mouse

Second Mouse Tales From China

While new global market participants are emerging from several countries, the Chinese are our primary example of these strong “fast learner” firms because they not only have finely-honed Second Mouse skills, they are downright proud to be fast followers.

Recently, we have published articles spotlighting the emergence of Chinese firms that are assuming a significant position in global markets.[1] In particular, we have emphasized the “fast learner” and “fast follower” skills that have enabled such firms to penetrate global markets with products that are “almost as good, at a great price.”[2] We have used the analogy of the “Second Mouse” (from the saying “The early bird gets the worm, but the Second Mouse gets the cheese”) for such firms, reflecting their strong abilities to learn, while avoiding the fate of the first mouse and also capitalizing on the investments made by “early bird” firms that introduce the technologies and products that these Second Mouse firms bring into their portfolio.

While new global market participants are emerging from several countries, the Chinese are our primary example of these strong “fast learner” firms because they not only have finely-honed Second Mouse skills, they are downright proud to be fast followers. It is one of the factors that has driven their success in the middle market of China, as they evolve western products and technologies to meet the needs of Chinese customers at acceptable price points.

Those same competencies are enabling these firms to become a force in western markets, as they achieve scale in China and then turn their attention (often with government support) to expanding into global markets. In fact, the ability to quickly learn and evolve products and technologies developed outside of China has already propelled numerous Chinese firms to global stature in even the markets where the products from which they’ve learned originated. In some cases, the same products that they’ve sold in China, at the lower price points, are attractive to global customers. In other instances, success has required that they upgrade their products toward “just as good, but without the bells and whistles, and at a great price.”

The implications of these emerging global giants from China are many and diverse. For some western firms, they represent a major opportunity: these Chinese firms will become major customers for many western suppliers. In fact, one of the strategies of many of these Second Mouse firms has been to buy critical ingredients from the same suppliers that serve established western companies in their industries. Many of the automotive industry suppliers from North America, Japan, and western Europe are citing results driven by their sales in China, as one familiar example.

But for other western firms, these Second Mouse firms will become the most formidable competitors of the future, presenting a double-edged competitive threat involving innovation and price. We have argued that it is as close to a sure thing as exists in business that Chinese Second Mouse firms will change the competitive landscape over the coming decade. In many industries, this has already begun to happen. For others, the time is not far off.

For still other western firms, these Second Mouse firms will become a pivotal element within their corporate structure as these western firms acquire and integrate Second Mouse competencies into their portfolio, enabling them to sustain a global leadership position[3]. The firms that fall within this category must implement a very different approach to acquisition strategy and a new perspective about what is to be accomplished in the integration process. Acquisition priorities must be refocused on strong Second Mouse companies, and integration priorities must emphasize not just retaining, but fully assimilating, the core competencies that these acquired firms can bring to the firm that acquires them. Implementing such an acquisition and integration strategy will represent the dominant contribution of globalization in future years, namely combining competencies that are strong in different global markets and cultures in order to achieve competitive leadership across all markets and over the full technology life cycle. There are several western firms that have already successfully done this, strengthening their leadership position, but the examples remain few and far between.

Almost no western firm can afford to ignore this change in the business landscape. For most firms, it will be the major opportunity or challenge of the coming decade, perhaps both.

The Anatomy of the Second Mouse

We recently met with an executive in a global equipment manufacturing company who subscribes to the concept and significance of the Second Mouse firms. His questions to us focused on identifying Second Mouse companies and their characteristics, both as they emerge and as they move into global markets. Our response draws upon insights gained from studying several confirmed Second Mouse companies that are now familiar names to participants in their industries, although perhaps unknown to individuals in other segments of the economy.

In this article, we will draw primarily upon five companies as examples of the Second Mouse phenomena, but the roster is much longer than that. First on the list is Huawei, perhaps the poster child of the Second Mouse concept. Founded in 1988, this telecommunications equipment supplier didn’t operate outside Mainland China until 1996, and then it expanded only into Hong Kong. But by 2008, over 75% of its $23 billion in sales were outside China, and the following year, it surpassed Nokia Siemens and Alcatel Lucent to become the second largest telecommunications equipment provider in the world, trailing only Ericsson. With sales just shy of Ericsson’s $28 billion in 2010 and a growth rate of 24% compared to flat sales at Ericsson, Huawei is probably worth 50-100% more than Ericsson’s $39 billion market capitalization[4].

The other Second Mouse examples upon which we will draw include Haier, founded in 1984[5] and already one of the world’s leading white goods and appliance manufacturers; Geely, which entered the automotive manufacturing business in 1997 and is now among the top Chinese car companies; Sany, a company founded in 1989, now a major supplier of cranes, pile drivers, and other construction equipment used in applications as diverse as road construction and wind farms; and Mindray, a medical equipment supplier founded in 1991, with specializations in patient monitoring, medical imaging, and other diagnostic equipment. We have chosen to spotlight these five companies from a much longer list of Chinese firms that we’ve studied because they span a diverse spectrum of business and consumer markets and technologies. They also range from private companies to state-owned. They are at different points in their journey to becoming global giants, albeit all well along the path.

What unites these Second Mouse companies is their superior implementation of learning and follower skills that is immediately obvious from the fact that the oldest of the five is still a few years short of thirty. Most of the product lines sold by these firms are ones that have been in the market for many years longer than these firms have been in existence. So, they entered markets with strong, well-established incumbents, at least outside of China.

In their early years, all of them “borrowed” in some way or another from western firms. In most instances, company roots can be explicitly linked to western customers that provided technology and design. Haier got its modern start as Qingdao Refrigerator Company, manufacturing refrigerators for Germany’s Liebherr Group (and eventually borrowed its present name from the ‘herr’ portion of that firm’s name in Chinese). Geely got its start producing refrigerators and scooters, with its first car being a licensed copy of the Daihatsu Charade.

What each of these firms did so successfully was draw upon existing technology and design, and then use those foundations to grow to a strong position in local, then regional, and finally global markets. The sections below describe some key elements of their journey, ones that can help to identify the future Second Mouse companies that will become major customers, fierce competitors, or important divisions of western firms in the years to come.

Building upon Success in China’s Market

The first important observation about the new global competition from China is that the companies have developed their foundations – including scale and competencies – in China’s own markets. Like Huawei, most of the Second Mouse companies operated exclusively in China during their formative years.

Their Chinese roots are important in two regards. First, these Second Mouse firms are consummate practitioners of “China economics,”[6] learning how to deliver products to the broad middle markets of China at affordable price points. Their business practices are focused on saving cost – often beginning with relying on unconventional suppliers, such as rural villages that have become adept at producing certain components using otherwise unskilled and literally surplus labor. As we will describe in some detail later, affordability in a low-wage market also can include delivering products that are not completely vetted for quality and reliability and then providing outstanding service to solve problems.

Their learning skills were manifested in another way during the formative years of these companies. Many Second Mouse companies were hired by western firms as contract manufacturers, as the Haier example provided earlier suggests. As a result, they were exposed to many of the best practice manufacturing and sourcing concepts developed by these western customers. And, like they did with their exposure to western technology and design, these Second Mouse firms followed those concepts that would contribute to their success in China’s markets, discarding those that would not. But by even the harshest western standards, these firms now practice manufacturing and sourcing competencies that are exceptional. That is not only one of the reasons why they have the potential for success in global markets, but also a key reason why they were successful in China’s own markets, beating out many other Chinese firms that aspired to serve the same middle market customers as did these Second Mouse companies.

There are many secrets to China economics, but the underlying factor in these companies’ success is the mindset that existing competitive products in the global marketplace are acceptable to the market, but they must be offered at a significantly lower price. It is that mindset of focusing efforts on emulation, simplification, and streamlining that allows these and other Chinese companies to reach the price points necessary for success with Chinese middle market customers.

To anyone who does business in China, it is hardly news that there are Chinese competitors operating at a dramatically different price point. What it is critical to recognize is that these Second Mouse companies accomplished much more than just reaching low price points as they became market leaders in China. The Chinese customer, whether a business or a consumer, is today acutely aware of the products available from the firms that enjoy leadership positions in western markets. In fact, most of these products are available in China. What the Second Mouse company must accomplish is offering a product-service combination that measures up to those standards, but at a much lower price point than those offered by the western firm. Their mastery of China economics enables them to reach the necessary price points, but this must be done without compromising their ability to deliver an almost as good offering in comparison to the available western options.

The pure scale of China’s middle market is the second reason that Chinese roots are important for these firms. Case studies suggest the importance of achieving scale quickly in the strategies of these Second Mouse firms. Mindray, for example, achieved success in the Tier II hospitals of China (with the elite Tier III hospitals typically buying equipment from western companies). The Tier II hospital segment has scale (over 10,000 hospitals compared to less than 2,000 in the Tier III cluster) and ongoing needs for medical diagnostic and testing equipment, but faces funding constraints that require the contributions of China economics to reach acceptable price points.

The ability to achieve very large scale quickly has provided a foundation for success of all of the Second Mouse companies. Just about everyone is familiar with the boom in construction across China, with the country’s emergence among the “most connected” countries in terms of telecommunications infrastructure, and with the rapid growth of disposable income, allowing Chinese consumers to buy cars, appliances, and other such products. It allows Second Mouse companies to achieve a lifetime of growth in a decade. And, among other contributions, that lifetime of growth yields a balance sheet more typical of a much older company.

But for every success story like Huawei or Haier, there are dozens and dozens of stories of firms in the same industries that failed to achieve similar success. So the scale of the market alone is not enough to ensure success. With more than 100 manufacturers of automobiles in China, there is no shortage of competitors to Geely that are on the verge of failure rather than breakout global success, candidates for closing or being restructured by combining with the more successful. As they learned from and followed the early birds from the west, the Second Mouse companies were genuinely second in the race, beating out many other competitors that also targeted China’s middle market. In the following section, we will spotlight three factors that are common to the success stories of these Second Mouse companies.

Service, Investment, and Friends

One of the key elements of the success of Second Mouse companies has been their emphasis on providing service to their customers. Company websites and histories chronicle this commitment. “[Haier’s] customers deserve the most efficient service from a knowledgeable, motivated, and well-trained support staff.” “Sany group is committed to providing customers with all-round and efficient services.” Huawei publishes a Service magazine to help its customers “discover how we address new O&M challenges and needs during business transformation, and read stories of our customers’ success enabled by our professional service solutions.”

This tradition of service has its roots in part in China economics. With a large low-cost labor pool, firms such as these find it less expensive to invest in service than to take the steps required to ensure high levels of initial product quality. Some of the leading companies in China, like Haier, are so famous for their service that end customers are forgiving when one of their products is not as reliable as the competition, knowing that the problem will be quickly solved. Some even cite such firms as doing beta testing in customers’ homes. This attention to customer needs and China economics is one of the defining characteristics of a Second Mouse company.

But, as was the case of being able to take advantage of the scale and growth of China’s markets, not all Chinese companies have been able to develop a strong service culture and build upon that foundation. These Second Mouse companies that we highlight here did so, and when they later moved into markets outside of China, they brought that culture with them, even when the business environment into which they moved didn’t offer the same abundant low-cost labor pool as was available in China.

The second pillar upon which these firms built was investment. While their web sites today tout innovations that stand up to tough western standards, over the years, their investments have reflected the opportunities available to Second Mouse companies and the priorities of customers in China’s middle market. In 2006, Dirk Pilat, head of the OECD’s science and technology section, in reporting that China had overtaken Japan as the second leading spender on research and technology, observed that the bulk of the spending in China was on development work to alter products for the Chinese market, rather than on basic scientific research. Such an orientation is appropriate to a firm that aspires to dominate the middle markets of its target countries, as price is always a factor in the purchase decisions in such segments. The Second Mouse companies have consistently shown an ability to understand what features are viewed as critical by their customers and which are viewed as unnecessary, and a willingness to engineer the latter out of the product and out of the cost base.

This commitment to investment has nonetheless been a hallmark of these successful Second Mouse firms, evolving somewhat as they have matured. Huawei personifies this commitment and the company’s ability to implement it. “Moving forward, we are committed to providing products and solutions for the cloud, pipe and devices businesses and helping operators to achieve business success with our ABC strategy: growing average revenue per user (ARPU), increasing bandwidth, and reducing cost.” Huawei was ranked fifth among the world’s “Most Innovative Companies” by Fast Company in Feb 2010, behind only Facebook, Amazon, Apple, and Google.

Huawei is not unique in its commitment to product and technology investments:

  • Sany ranks #72 on the current Forbes’ list of “The World’s Most Innovative Companies.” “Each year, Sany Heavy Industries Co., Ltd would put 5% of sales revenue aside for its R&D. It aims at upgrading its products to the world’s advanced level with the conviction that ‘quality changes the world’. Now Sany Heavy Industries Co., Ltd has its own post-doctoral research centers, which have become one of the country’s top technological development centers, obtaining more than 536 authorized patents and developing hundreds of key technologies.”
  • Haier has currently obtained more than 7,000 patented technology certificates (1234 for Haier inventions) and 589 software intellectual property rights. Haier has hosted and taken part in modification of about 100 technological standards.”
  • “Geely participated at the 2008 North American International Auto Show in Detroit, winning the Special Contribution Grand Prize for Invention and Creation for its Blow-out Monitoring and Brake System (“BMBS”), a unique safety system independently developed by Geely.”

Second Mouse companies are not content. They not only learn how to follow the technology and design leaders of the western world, but also learn how to become technology and design leaders themselves. In addition to spending money on R&D, they look for faster and “more Second Mouse” ways of becoming leaders.

In the process, these companies often acquire the companies from which they once learned. Geely recently did so with Volvo. Mindray’s entry into the U.S. market was bolstered by their acquisition of DataScope’s patient monitoring business. Haier’s $1.3 billion unsuccessful offer to acquire Maytag was widely reported as an attempt to capture a leading-edge western technology base, as was Huawei’s attempt to buy 3Leaf Systems. While the latter two acquisition attempts failed, both of these firms have been quite successful with other acquisitions over the years.

The third pillar for the growth and success of these Second Mouse companies has been the support of the Chinese government. Very little happens in China without the support of its government, and business success is not an exception. In some of these cases, the support of the government was direct and central to growth. Haier’s ownership by the Qingdao government led to its early acquisition of its main competitor in Qingdao, fostered its early relationship with Liebherr, and gave it the financial wherewithal to expand and serve the national market until it was able to access formal equity markets. Government relationships are usually a double-edged sword, as Haier has found out frequently when the local government has attempted to arrange for Haier to take over ailing local companies to preserve jobs. Doing so would be more of a burden than a benefit, but without government support it could surely never have grown to the position it holds.

Despite being a private company, Huawei’s strong government connections facilitated it becoming the supplier of choice to the government-owned telecom companies. As Huawei has entered foreign markets with creative financing and business propositions, support of China’s government and state-owned banks have given it a significant edge. More recently, the rumored complex relationships of Huawei to the Chinese military have impeded business in the U.S., among the few markets in which it hasn’t yet achieved significant scale. But, even for a private company, the support of the government is nonetheless vital in its success.

Sany is an outlier, sometimes referred to as a miracle – a private enterprise in China without an industrial base in the country’s northeast and not enjoying the policy incentives given to state-run enterprises. Nor did it begin business with an abundance of capital that a government enterprise would have. Nonetheless, it is now the world’s largest concrete equipment manufacturer, having risen to #431 on the FT Global 500 after a decade of 50% annual growth, and achieved a market capitalization of $22 billion. Despite being private, its growth was fueled by good relationships with the government as a customer in China’s infrastructure development, as well as the supplier of land and other resources.

Government policies have been important on the technology side as well. “China’s brilliant ‘Fast Follower’ innovation policy is generating the biggest transfer of technology in history. A combination of state-driven policies is driving this policy — requiring Western companies to partner with Chinese firms to do business; demanding transfer of the latest technologies in exchange for access to markets; favoring ‘indigenous innovation’ in government purchasing; fencing off green and other industries from foreign competition; offering low-interest state-bank loans to local champions.”[7]

Increasingly, we see the industries in which the Second Mouse firms are operating appearing among the priorities defined in the Five Year Plans issued by China’s central government. Those plans provide support in a variety of areas, including funding purchases in the market, supporting R&D directly and through research institutes, and changing laws and regulations to foster development.

Global Expansion, by Stages

Up until now, our focus has been on the factors that have enabled these Second Mouse firms to achieve success in China. They have successfully built upon the existing product and technology bases available from the west, developed world-class manufacturing and sourcing skills, taken advantage of China’s scale and mind-boggling growth rates, drawn upon friends and the support of China’s government, and successfully mastered the challenges of delivering best-in-class service and managing an innovation process suitable to the value propositions required to succeed in China’s broad middle markets.

What is critical to recognize is that these exact same factors are foundations for success in other markets. We often cite firms like Southwest Airlines and Vizio as western examples of firms that practice many elements of the Second Mouse business model – delivering almost as good products, without unnecessary bells and whistles, at a very attractive price point. The five firms we have used as case studies all started in China, gained scale there, and then began to expand globally.

Their first targets were usually nearby and similarly immature markets (e.g., Indonesia for Sany and Huawei). Haier’s CEO initially defined a different approach in order to emphasize the mandate of quality: “taking on the difficult one first and then the easy one” and went first to Germany. This is the same legendary chairman, Zhang Ruimen, who started a revolution in company culture in 1985 by responding to a complaining customer by lining up 76 faulty refrigerators he found in the factory and ordering the employees to smash them with hammers. At a time when a refrigerator cost two years of an average worker’s wage, the workers tearfully refused, to which Chairman responded: “If we don’t destroy these refrigerators today, what is to be shattered by the market in the future will be this enterprise!”[8] The hammer still sits in the company’s exhibition hall to define the company’s quality mission. Zhang was making an equally symbolic point with the decision to export to Germany, at a time when Chinese products were hardly respected. But when it came time to truly penetrate a foreign market, Indonesia was also first for Haier.

For most Second Mouse companies, global successes were indeed first concentrated in the emerging markets of Asia (including major population centers like India and Indonesia), then in similar immature markets in Africa, the Middle East, Latin America and Eastern Europe.

But expansion hasn’t stopped at the borders of the most advanced markets of North America, Europe, and Asia. Huawei, our prototype for the Second Mouse companies, currently serves 45 of the world’s top 50 telecom operators. The other case study examples are similarly active in establishing their global position:

  • “On April 30, 1999, Haier unveiled the America Haier Industrial Park in South Carolina, marking Haier’s entry into the U.S. market. The park covers 46 hectares with an annual production capacity of 500,000 units. Haier chose the United States to build its first industrial park outside of China, and the U.S. was also the site of Haier’s first ‘Three-in-One’ operational framework: a design center in Los Angeles, marketing out of New York, as well as the manufacturing facility in South Carolina.”
  • “Geely’s distributor network extends to 45 countries across five continents with 500 retail distributors and nearly 600 service stations. Sales are supported by nearly 300 dealers.”
  • Sany has set up over 30 overseas affiliates capable of covering more than 150 countries. Its products have been exported to more than 110 countries and areas. “Sany has invested 100 million Euros to build…an R&D center and manufacturing base covering a total area of 250,000 m2…aiming to achieve the strategic objective of complete localization of Sany Germany.”
  • Mindray’s revenues are evenly split between China and international markets and its global footprint spans several continents with offices located throughout China, and overseas in Brazil, Canada, France, Germany, India, Indonesia, Italy, Mexico, Netherlands, Russia, Turkey, the UK, and the United States.

The ability to deliver almost as good products at very attractive price points travels the globe quite well. Even the middle markets of the most advanced countries find that value proposition highly attractive. For those western firms that continue to embrace the fiction that competition from Chinese companies is generations away, the future will quickly become a most frightening one.


We noted at the beginning of this article that the emerging Second Mouse companies from China will define the opportunities and challenges of the coming decade for most western firms. For some, they will become the newest major customers. For others, they will create a competitive nightmare. And for the most proactive western firms, they will become the cornerstone for sustained global leadership in a business environment where opportunity, innovation, and competition will increasingly be centered in countries like China.

The need to identify the Second Mouse companies that will reshape each industry’s future is a critical one. Their roots will involve exceptional levels of success in China (and other emerging markets), and their identities will be shaped by their service and innovation competencies. They will exhibit leadership in their home markets, but with capabilities that travel well, first into other price-sensitive emerging country markets, but eventually into even the most advanced markets around the globe. For western companies, the challenge will be, first, that of identifying the Second Mouse companies from among a long list of aspirants, and, second, deciding upon the elements of a strategy that acknowledges their inevitable position in global markets.

[1] See George F. Brown, Jr. and David G. Hartman, They Aren’t Who We Thought They Were, Industry Week, January 31, 2011, and George F. Brown, Jr. and David G. Hartman, Are You Ready to Take On China’s Next-Generation Competitors?, Chief Executive, September 2011.

[2] See George F. Brown, Jr. and David G. Hartman, The Second Mouse Gets the Cheese, Sales and Service Excellence, June 2011.

[3] See David G. Hartman and George F. Brown, Jr., Change Before You Have To, Business Excellence, August 2011.

[4] Huawei is a private company, so there is no direct measure of market cap, but using the analogy of similar but smaller Chinese competitor ZTE, we speculate that Huawei would be valued at $55-70 billion.

[5] Like many Chinese companies, the modern Haier has its origins in a much older state-owned “factory” but its history as a commercial enterprise dates back only to 1984.

[6] See David G. Hartman, China Economics: Unraveling the Mystery of China’s Low Costs, Blue Canyon Partners, Inc., © 2007.

[7] Bruce Nussbaum, Harvard Business Review, The Conversation: What’s Wrong with America’s Innovation Policies?, January 26, 2011.

[8] People’s Daily, August 8, 2001

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