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This transition has implications not only for local companies
but also for foreign-owned businesses operating in China.
MNCs begin to face a new set of challenges: In the very
beginning, MNCs pursued a pure import-driven strategy.
Fueled by the goal to quickly gain market shares, MNCs
often introduced the internationally applicable best practices
of their home-market product portfolios. This strategy
could guarantee a successful entry into the Chinese highend
market, as innovation capabilities were much scarcer in
China than abroad. Having already achieved world-class status
at home, established foreign players’ product solutions
used to be technically advanced, allowing them to leverage
their existing knowledge and R&D capabilities to out-innovate
local companies.
THE CHINESE BUSINESS ENVIRONMENT IS BECOMING
A LOT MORE DEMANDING
Yet in light of the shifting Chinese market landscape, local
competition is increasing. Local companies have decisive
advantages since they are better positioned to understand
Chinese customers’ demands. Accordingly, adapting to specific
local customer preferences is a key factor for success.
This is especially true for China’s current economic climate,
in which demand varies greatly across industries and regions:
There is a geographical shift occurring as the consumer
population grows from coastal areas into newly emerging
inland markets. This growing domestic wealth is bringing
an increasing degree of heterogeneity across Chinese endmarkets.
Moreover, local companies often react with more
flexibility and agility to changing market demands. By contrast,
MNCs’ usually complex organizational governances
and standards entail slow decision making processes,
leading to a lack of flexibility and speed-to-market.
THE CONSEQUENCES ARE EVIDENT
On the one hand, MNCs will feel significantly under pressure
in the mid to high-end segments because of local companies
introducing customer-specific products at a decent quality
level. On the other hand, MNCs are often also not able to compete
in the low-end segments, as their ability to grant price
decreases to their home-made product portfolio is limited.
No matter how one looks at it, there is no getting around the
fact that MNCs’ product portfolios need to undergo a fundamental
transformation in order to withstand intensifying
competition and increasingly diversified market demands.
Not only must existing products be significantly adapted or redesigned,
but also novel business models and processes may
be required. The times when MNCs could count on harvesting
profits just from bringing their home-market products to
China are over. Local competitors are clearly on the rise – for
now mainly in China, but soon very likely also in the rest of the
world. The figure shown below summarizes the transformation
of China’s market landscape along four major stages. ||
FIG. 02 І TRANSFORMATION OF CHINA’S MARKET LANDSCAPE ALONG FOUR MAJOR STAGES
According to product segments: Imported MNC 1) products Localized MNC products China-originated Tier-1 products China low-end products
1 IMPORT MARKET 2 RISING COMPETITION 3 LOW-END DECLINE 4 CHINA TAKES OVER
Premium
global for local
Premium
local for local
Low-end
local for local
INCREASING LEVEL OF COMPETITION
The market is dominated
almost exclusively by Chinese
companies at a low price level
Co-existence of a small
import market covering the
high-margin premium segment
Innovation efforts drive the
number of higher-quality
Chinese companies
To combat rising local
competition, MNCs start to
design distinctive mid-market
products specifically for
Chinese markets
Over time, enhancement in
education, further investments
in R&D, as well as stricter quality
and safety standards, lead to more
internationally competitive
Chinese Tier-1 companies
Chinese companies take
the lead on a global level –
Chinese products are part
of global competition
1) MNCs refer to business organizations that have business activities located in more than two countries; in the context of this report and the conducted survey,
MNCs have an interntional headquarters and established branches or subsidiaries in China