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They Aren’t Who We Thought They Were
It is as close to a sure thing as exists in business to assume that the ranks of top competitors will soon include Chinese companies.
Several years ago, former NFL coach Dennis Green responded to a reporter’s question about his team’s opponent by saying “They are who we thought they were,” a quote subsequently made famous by its inclusion in a popular series of beer commercials featuring interviews with football coaches. For most companies, that answer would have been an appropriate response to an analyst’s question of the form “Who are your most formidable competitors?” But in the future, that may no longer be true.
Already, western firms in a variety of industries are revising their traditional list of competitors to include such Chinese companies as ZTE, Lenovo, NetEase, Huawei, Haier, and Gree. Each of these has become a competitor not only in China, but in world markets, often expanding their presence through investments and acquisitions in developed country markets. Firms in the wind power industry, as another example, now include on the list of industry giants Dongfang, Goldwind, and Sinovel, all Chinese companies beginning to expand their reach into global markets. The roster of examples of Chinese firms emerging as forces in global markets continues to grow year by year.
There are multiple reasons for the success of these companies. First is the rapid growth of the Chinese economy and higher incomes of Chinese consumers, a combination which has provided the fuel behind the growth of many of its companies. They have not only gained scale as a result, but also been forced to deliver products and services attractive to Chinese consumers who often have a full spectrum of foreign brand options available to them.
A second reason has been the tremendous growth in the engineering and science professions in China, reflecting a national emphasis on education in these fields. And while the quality of Chinese scientists and engineers has improved considerably, their cost is still low compared to those in western markets, perhaps only 20-25% as high. That cost advantage enables Chinese companies (and western companies with operations in China) to put far more resources onto development programs than is possible in western markets.
Chinese companies also succeed because of advantages of government backing that others cannot match, allowing them to change the game in international markets. The wind power companies mentioned above are entering the U.S. market with full development packages. These include attractive financing for projects provided by the Chinese Export-Import Bank, which was recently reported by the Wall Street Journal to provide more export financing for Chinese companies than the total of the Group of Seven Industrial countries (including the U.S.) In some cases, Chinese manufacturers of wind turbines are supported by the state-run banking system to the extent of developing, owning, and operating wind farms here themselves, something that they are not able to do in China. One stated very directly: “We see the best way to sell to the U.S. is to be our own customer.”
A further reason for success involves the forces of globalization themselves. Most everyone is aware of the explosion of auto production in China, with a recent sales release suggesting that 2010 production in China topped 18 million units. Not only are the largest global carmakers — VW, GM, Toyota, Honda, Ford, etc. – operating in China, typically in joint venture relationships with Chinese companies, but so are most of the major global automotive parts and systems suppliers – Bosch, Eaton, Valeo, Delphi, Michelin, Dow, Denso, etc. These suppliers are eager to serve the rapidly growing Chinese auto manufacturers, and their technologies will someday be a part of Chinese nameplate cars sold in world markets. In China, they have solidified their credentials by advertising their cars by listing branded components (a la “Intel Inside”).
U.S. observers can reflect on the shortened time that it took for carmakers from other countries to achieve a presence in the U.S., from the relatively long time that it took VW to build scale, to the more rapid success of the Japanese companies like Toyota and Honda, and then to the fast inroads recently made by Hyundai. In the near future, we will most likely see another example of “China speed” as one of their carmakers begins to sell in U.S. markets. We should also not be surprised to see them advertise their vehicles as being assembled from the same branded parts and systems that make up their top competitors’ cars. Probably soon after, that Chinese carmaker will join the roster of the auto industry’s global players.
A number of years ago, Georgia Tech developed a set of “High Tech Indicators.” They have used this over the years to rank nations relative to one another on technological standing, with a focus on country abilities to export high technology products. Among the variables that they examine are country orientation toward technological competitiveness, socioeconomic infrastructure, technological infrastructure, and productive capacity. The indicators themselves reflect a combination of quantitative and qualitative inputs. The indicators released in 2007 show China leading the world with a score of 82.8, compared to 76.1 for the United States and even lower scores for other developed countries. In the 1996 indicator release, China’s score was only 22.5. Whether China is poised for global leadership in 2011 can be debated, but it is hard to question the facts that they are poised to compete at a high level today and will become even more formidable in the future.
The rapid entry of Chinese companies in global markets has important implications for western businesses as they plan for the future. We think there are three things that firms should incorporate in their strategic planning with respect to the competition of the future.
First, we believe that it is as close to a sure thing as exists in business to assume that the ranks of top competitors will soon include Chinese companies (and probably ones from other emerging markets), like those cited in the earlier list of current examples of Chinese companies that compete globally. It is somewhat useful to try to forecast which companies will emerge in this regard, by looking at those that have scale in China and that are serving the “Better-Best” end of the Chinese market. But you can also anticipate some surprises, and we suggest looking closely at companies that have the right technology foundations to enter your market, even if they are not producing such products at present. Keeping a close watch on Chinese industrial policy is also useful in this regard, with the firms and technologies getting emphasis and funding from the government gaining capabilities that can later translate into global competitiveness. The strength of China’s alternative energy firms, such as the wind power companies mentioned earlier and others in segments like solar power, reflects deliberate policies aimed at building China’s capabilities in those industries.
Second, whether the future competitors can be named or not, it is worth reflecting on what the global industry will look like with another major player or two in the mix. Will global demand grow enough (mainly in markets like China) to absorb additional capacity, with just a rearrangement of participants on a global checkerboard, or will the addition of new players place pressures on the industry’s profitability and potential for continued investment? When we examine pricing pressures in an industry, excess capacity always emerges as one of the most important factors behind such pressures. If new entrants from China and elsewhere only translate to excess capacity, it then becomes essential to plan for such an unpleasant environment.
This is not to suggest that the future scenario will involve Chinese entrants that compete only on price. They may have some cost advantages that span all of their processes, and they may in fact use lower price as strategy element in their first attempts to enter western markets, just as was done by carmakers like VW, Toyota, and Hyundai earlier. But the products of Chinese firms are not necessarily only going to be targeted at lower price points. Anyone who has shopped for appliances recently has seen higher-end brands from firms from China, Korea, and other Asian economies.
The ability of Chinese firms to reach the markets at the Better-Best end of the product spectrum will increase continually, reflecting their improving position in terms of engineering and design. And in some industries, this reality will create a double-edged sword as new competitors bring innovation and attractive pricing to the market.
The third implication we emphasize as critical to planning returns to the concept of “China speed” that we mentioned earlier. Over and over, we have observed the ability of Chinese companies to move at a pace that is unequalled in western markets. One of the industries in which the Chinese are investing is high-speed rail. We suggest that as an analogy to keep in mind when you think about the characteristics of your future Chinese competitor. Whether it is product development or decision making on an acquisition or some other business activity, anticipate that they will move at a pace that will make your own processes feel like the coal trains of the early 1800s. Unless your firm is able to change, speed will be one of the major sources of competitive disadvantage that you will face vis-à-vis your new Chinese competitor.
Getting ready for future competition from companies in China and other emerging markets is not an optional activity. The day is coming when such organizations will change your business landscape, adding to the challenges you already face from the usual suspects among traditional competitors from developed country markets. Accepting the inevitability of their entry into your markets, thinking through how the industry landscape will change, recognizing that these firms will often compete both through innovation and cost advantages, and preparing for the realities of their competitive edge in such areas as speed to market will not make this problem go away, but will certainly raise your odds of emerging among the successful firms in the subsequent roster of global players.
Authors: George F. Brown, Jr. and David G. Hartman