The Second Mouse Gets The Cheese

Driving into Tampa recently, we saw a sign that read “The early bird gets the worm, but the second mouse gets the cheese.” At a subsequent workshop focused on the challenges of doing business in China, we described that sign. Almost all of the participants, including both of us, had heard the “gets the worm” component of that message from parents, teachers, bosses, and many others. But hardly anyone, including us, had heard the “gets the cheese” alternative. It provoked a lot of discussion[1], as we used the saying as an analogy for what was happening today in China’s “fast learner” economy.

Examples of China’s ability to learn span multiple industries. The most telling reflection of this progress comes from looking at Fortune’s Global 500. In 2005, only 13 Chinese firms made the list, with only three of them among the top 200. Just five years later, in 2010, 46 Chinese firms made the list, including 14 among the top 200 firms. The explosive growth of China’s domestic economy is the primary fuel behind that change, but it has propelled many of these companies into meaningful positions in world markets.

Barely more than a decade ago, most of the few motor vehicles seen on China’s highways were either cycles or very old designs like the “bread loaf vans.” Quickly thereafter, dominant positions were established by the likes of Volkswagen and Buick with vehicles produced by joint ventures. Today, you can see Chinese nameplate cars from companies like Chery, BYD, Changan Auto, Great Wall Motor, and Dongfeng in many countries around the world. While even most Chinese still believe foreign brand cars are superior to those of the Chinese carmakers, the gap has closed dramatically. Part of the reason is that learning what happened in joint venture relationships. Regardless of the “how”, when coupled with the price points of Chinese cars, the “what” is competition from China that is real. Many believe that the only reason for the slow entry of Chinese carmakers into world markets is the pace they have had to sustain just to keep up with domestic demand.

Huawei, barely thirty years old, now is among the Big Three manufacturers of telecommunications equipment, along with long-term giants Ericsson and Nokia Siemens. It is estimated that one of six people on our planet has phone service that uses their hardware. Unlike the situation with cars, Huawei products are fully competitive with those of western firms in the most demanding markets and applications. Their competitors have not been slow to register complaints about Huawei copying their products, but Huawei has responded by throwing incredible resources at becoming the leading global patent registrant in recent years.

The examples of such successes aren’t restricted to manufacturing companies. Even in professional service industries like Engineering, Procurement, and Construction, the roster of top global companies now includes many Chinese companies. Engineering News-Record listed five Chinese companies among the world’s eight largest contractors in 2010, all ranked ahead of such well-known companies as Bechtel, Fluor, and Kiewit.

China’s ability to learn quickly and translate that learning into business success has even been cited in the debate over U.S. national policy towards science and technology: “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. This industrial policy is at odds with WTO standards, but is a boon to Chinese economic growth and a long-term threat to U.S. global competitiveness.”[2]

Debates over national economic policy aside, the question we think is most critical to address is whether western companies that have long enjoyed the benefits of being the “early bird” are fated to become the “first mouse” at some point in the future as Chinese fast learning skills continue to improve. Certainly hints at this unpleasant prospect have been provided by the exodus of manufacturing jobs from the U.S. over the past several decades, many to China, although in the past the exodus was to factories producing the same brands that formerly were made in the shuttered factories at home. We think there are some reasons for optimism and some lessons that western firms can implement to avoid the “first mouse” trap.

One basis for optimism is rooted in the growth of the economies of China and other emerging countries. As with motor vehicle production, Chinese domestic demand in many industries has strained the domestic industry so that it has barely had time to think about global markets. We’ve similarly seen instances in which low-cost Chinese engineering talent, still in proportionately short supply despite the graduation of a million engineers a year, has been bid away from western firms by Chinese companies targeting their own home market. While the population in China (and other countries like India and Indonesia) may for decades offer relatively low costs, it is probably true that the imbalance of the recent past, when the only markets of interest were in the west, will never return.

The steps that companies take to secure their own future had better be more aggressive than relying on global economic forces to avoid “first mouse” outcomes. The starting point for our recommendations recognizes the fact that there are always going to be payoffs from being the “early bird.” Some markets will always reward the innovators, and in those industries the premium buyer segment alone could be enough to provide a solid return on investment to the innovators. But the opportunities are also there to significantly extend the “early bird” benefits beyond those premium buyer segments. We emphasize three strategies designed to allow “early birds” to enjoy cheese along with their worms.

First, “early bird” firms will have to learn, at a level and pace never before experienced, how to become “second mice.” In some sense, this will require them to become “Chinese firms,” sometimes figuratively, often literally. They will have to learn: (1) how to evolve products at China speed, (2) how to reengineer them to take significant costs out without massively degrading the product, and (3) how to think far out of the box about ways to achieve a technical goal or manufacturing cost goal.

Those attributes are what we’ve observed over and over in successful “fast learning” Chinese firms. Their product development cycles are dramatically shorter than those of western firms, sometimes almost an order of magnitude so. Their skill in taking costs out isn’t merely a reflection of cheap Chinese labor. Instead, it reflects an ability to not only ask “what if we don’t include this feature” but also try it out in the market, unlike what we typically see in the west. And beyond using phrases like “thinking out of the stadium” instead of “thinking out of the box”, it’s almost impossible to convey the benefits of being unencumbered by history and the status quo.

The literature on globalization has emphasized the benefits of aggregation (gaining scale as a global company) and arbitrage (gaining leverage by taking advantage of capabilities in one country that are important to customers in another country). We think that the strong global firms of the future will also gain advantages from the abilities to exploit attributes such as the three described above in their portfolio. A firm that can be both an innovator and a fast learner, institutionalizing best practice competencies honed in different country markets, will surely win out over a firm that is only good at one of the two skills.

For some firms, it will be possible to get there by achieving true global diversity in their work force. For many others, it will require mergers and acquisitions to gain new competencies, and then demand strong management leadership and expertise to blend such competencies across all the firms in the company’s portfolio. In many discussions of hiring, mergers, and partnerships, the assessment has failed to value the contribution that will come from the competencies that exist from this third dimension of globalization. We think it may in the long run outweigh the more concrete benefits of market access and cost structure that today dominate such decisions.

Our second recommendation is that the western firms that want to remain among the global leaders in their industries must recognize the shifting markets which will define global leadership. In the past, and even today, a firm with a solid position in North America, Europe, and Japan is certain to be an industry leader. After all, those markets account for about 2/3 of world GDP. But in a relatively short time, that will change. Emerging markets already account for 2/3 of the growth in global GDP[3]. In the near future, the emerging market share of global GDP will rival that of the traditional developed country markets.

That fact has significant implications. If your firm isn’t a meaningful participant in emerging markets like China, it will inevitably be challenged to remain a global leader. That is a simple reality of scale. And being a player in emerging markets doesn’t simply mean manufacturing in those countries. It requires developing and delivering the products and services that the consumers in those countries want.

Doing this will require a transition for even the western firms that correctly claim that “they’ve been doing business in China for over a decade”. That statement has been true, but the devil is in the details. Doing business in China ten years ago meant manufacturing there for export to western markets. Doing business in China recently meant selling there to the high-end segment of western firms and the most prosperous Chinese. Doing business in China in the future requires selling to the mainstream Chinese customer, whether a Chinese consumer or a Chinese business. The transition to the future version of “doing business in China” will be every bit as demanding as have been the prior two transitions. But it will be necessary for those firms that want to avoid dropping from the list of global leaders.

Our third lesson is one that we suspect reflects our western culture and its biases and prejudices. For both of us, our first characterization of the “second mouse” was that it was awfully lucky to have been slower than the “first mouse.” While that second mouse did in fact get the cheese, it was much harder to admire it than it was to admire the “early bird.” That conclusion may be flat out wrong. The success of the “second mouse” may be as admirable as that of the “early bird,” just different. And when we recommend becoming a “second mouse”, we don’t claim that it is any easier than being an “early bird.”

In 2006, the OECD reported that China had overtaken Japan as the second leading spender on research and development around the world. Dirk Pilat, head of the OECD’s science and technology division, said the surge in Chinese research was stunning. He added that “Chinese investment has been growing rapidly for some time, but it is still a surprise that it has overtaken Japan so quickly.” Mr. Pilat also said that the bulk of the spending in China was on development work, to alter products for the fast-growing Chinese market, rather than basic scientific research. In the context of our analogy, it was investment appropriate for the “second mouse.”

We’ve had multiple discussions with firms that have faced new global competitors, ones that have begun to lose market share to them or have had to respond to price-based competition. In many of those discussions, the option of cutting back on product development spending has surfaced as an option, sometimes as a necessity. This presages a vicious cycle in which reductions in investment result in fewer innovations, leading to fewer “early bird” success stories, resulting in future pressures on investment. There isn’t a happy ending to that cycle.

The lesson we derive from this is that of redirecting investments to capabilities that yield competitiveness with the “second mice” that are coming into the market. Across industries, most western firms with which we’ve worked associate R&D and new product development primarily with advancing the state of the art. In some cases, they belittle investments which facilitate the introduction of products into broader markets. Yet that has been the secret of success of many of the Chinese firms that we know. They have figured out how to serve a less prosperous market, often their own, and in doing so, have become forces in world markets outside China. In our minds, this alternative is attractive in absolute terms, and certainly dramatically more attractive than becoming trapped in the vicious cycle of the “early bird” that can no longer afford to invest enough in the capabilities needed to get the worm.

In summary, China is forcing a reexamination of many long-held business concepts and strategies. Their success in industries in which their firms and products were basic (at best) only a few years ago is among those realities that force such a reexamination. We believe that their success as a fast learner has important implications for western firms that aspire to sustained global leadership. Implementing the three lessons described above – bringing global competencies associated with successful “second mouse” countries into your firm’s portfolio, embracing the emerging markets of the future, and rethinking the emphasis of spending on research and product development – can enable western firms to meet emerging competition and continue to reward their shareholders.

Authors: George F. Brown, Jr. and David G. Hartman

[1] The sign was in front of a heating and air conditioning service company along Route 54.  We hope it was as successful in generating business as it was in generating reflection.

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

[3] David G. Hartman, The Mandate of Global Presence, Blue Canyon Partners, Inc., © 2010.

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