04
02
NEW CHALLENGES
AHEAD FOR MNCS
Once again, China has arrived at a turning point. Since the
opening of China’s economy in the late 1970s, the country has
experienced double-digit growth rates averaging 10% during
the last thirty years. Never before has an economy succeeded
in lifting hundreds of millions of people out of poverty and become
so powerful globally in such a short time span. Among
other countries, China has achieved its unprecedented growth
story by drawing on its vast resources of “excess low-cost
labor” in rural areas. By reproducing basic manufacturing
goods in huge quantities at a minimum-wage level, the
country’s manufacturing industry could leverage economies
of scale and thereby achieve enormous profitability rates over
the coming decades.
But that was the China of the past. Today, the low-hanging
fruits have been picked and the “easy” gains in short-term
technological improvements have been made. The supply of
a rural workforce is gradually becoming scarcer as it moves to
the cities, and simply purchasing advanced equipment and
copying best-practices from Western companies will not be
sufficient to sustain China’s startling pace of change forever.
In addition, customer requirements regarding products and
services have significantly increased. Inevitably, China has
reached another milestone in its growth path: the challenge
of how to achieve future growth from technological evolution
instead of through factor accumulation. In fact, China is
experiencing a slow but steady transition from a low-cost
and labor-intensive economy to a knowledge-based one. To
manage this transition, China is significantly enhancing its
industrial mainland capabilities and upgrading to highervalue
industries. “Innovating in and for China” has become
an aspect of the strategies of Chinese companies, particularly
in light of the “Made in China 2025” initiative. This fiveyear
scientific and technological innovation plan by China’s
government aims to build China into an innovation powerhouse
and lift the country’s innovation competencies into
the world’s top 15 by 2020. By nurturing innovation at home,
and acquiring R&D capabilities from abroad, China is now
well underway in establishing its very own domestic culture
of innovation.
Stuck in the middle: while MNCs cannot keep up with the
competitive cost structure of local players, they are facing significant
headwinds from China’s strengthening innovation process.
FIG. 01 І CHINESE COMPETITORS GAINING GROUND
RESEARCH
59% 59%
41% 41%
DESIGN AND
DEVELOPMENT
54%
46%
SUPPLY
CHAIN
MNCs weaker or equal to Chinese competition
MNCs ahead of Chinese competition
56% 57%
44%
SALES AND
DISTRIBUTION
43%
MARKETING
Although most MNCs are still confident they
can lead the field, today China is perceived
as a highly competitive market. In our survey,
a considerable number of companies already
admit that their competitive edge in designing,
developing, selling and marketing new
products is endangered. Their corresponding
Chinese competitors have caught up or are
even already performing better.