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Pathways to Profitable Growth in China

It has become almost a daily occurrence to see a news headline on China’s economy since we published our last white paper on the topic (China: The Bad News and the Good News). However, the recent string of articles as well as a visit from our China colleagues prompted me to revisit how things have changed over the last 15 years.

Fifteen years ago, companies were in China for the low cost of manufacturing. Ten years ago, companies were riding the wave of explosive market growth. Inexpensive labor, minimal competition, high demand, and a host of other factors had companies flooding the market. And because of these very reasons, companies could afford to have a few missteps along the way and still be successful.

Today, however, that story no longer exists. With labor costs rising, the economy slowing, and competition growing, companies are recognizing that times are changing and that the market is not as forgiving as it once was. Operating in these challenging times can be particularly daunting for companies that are in declining or struggling industries, such as heavy equipment, construction, and mining.

Following are three areas that companies can focus on to enhance or sustain growth:

1.) Identify markets in China that are optimal for growth – While there are regions of China with labor shortages, rising incomes, and modern development, there are a number of provinces with a strong labor pool at modest incomes being knit together with a massive transportation infrastructure-spending program. However, China consists of 31 provinces and regions. Knowing which province(s) would be optimal for your business can be a difficult task, which makes the second area critical.

2.) Invest in understanding the market and customers – Successfully competing in a market as large and complex as China can be challenging without a deep understanding of the market—even to those companies with a long track record of success in China. China’s market is more diverse than most are accustomed to, with customers that range from those with no experience with your product to those as sophisticated as any elsewhere, and including a large number of government-connected organizations. Also, there can be competitors from global companies that operate on a similar business model to local Chinese competitors that may or may not be able to deliver on their promises. Reliance on reliable market analysis has been a critical component to ensuring the success of a company’s strategic growth plan. A detailed and thorough study executed properly can help prevent poor decision-making and can be a building block towards establishing a clear strategy map for the future. For more on this topic, read our blog, “Why In-depth Market Understanding is Critical to Growth Strategies in China.”

3.) Understand and adapt to the competition – In today’s Chinese economy, B2B companies that for many years had a large market share from well-known brands are being forced to rethink their strategy due to a growing broad middle market and Chinese competitors that compete on a business model of delivering products that are “just good enough” at a much lower price (i.e. Second Mouse firms). These competitors do not innovate or differentiate, but rather focus on costs and have become very good at it. They also know how to wring low costs out of the China environment of developed and undeveloped regions. To effectively compete, B2B companies need to evolve, blending what they already do well with the competencies that characterize these Second Mouse companies. This could include acquiring companies, but with an entirely different perspective on a firm’s acquisition strategy (i.e., assimilating the core competencies of the acquired firm into the acquiring firm’s business).

Finding ways to grow successfully and profitably in China will be more difficult in the years ahead, but not an impossible task if approached in a thoughtful, strategic manner.

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