The Idea in Brief
What multinational doesn’t want a piece of the action in China—with 1.3 billion potential customers, 9.3% percent annual economic growth, and a per capita income that quadruples yearly? Carried away by these figures—along with the Chinese workforce’s low wages—most multinationals have rushed to set up manufacturing facilities in China or sell products there.
But they’ve ignored an important development: the emergence of Chinese companies as powerful rivals not only within China but also in the global market. Why? Many global managers assume that Chinese companies aren’t big enough or profitable enough, or sufficiently financed or equipped, to pose a threat.
Yet as the Chinese government encourages more private ownership of companies, firms that blend private and public ownership are tackling the global market. Though these companies enjoy state support, the government doesn’t interfere in their management. It permits them to list on the China stock exchange ahead of other companies and acquire other firms quickly. Armed with these advantages, some “mixed-ownership” [AU: make sure this reflects style used in article] companies have quietly grabbed market share from older, bigger, and financially mightier rivals in Asia, Europe, and the United States. Western managers who ignore these “hidden dragons” risk seeing them become their strongest rivals in the next five years.
The Idea in Practice
Four groups of Chinese companies are simultaneously tackling the world market:
National Champions
These domestic leaders build global brands by identifying segments that global market leaders have dismissed because of volume is too low or profit margins negligible. They leverage their experience in adapting technologies and features to meet cost-conscious Chinese buyers’ price points. Low manufacturing costs give them a further edge. Example:
To enter the U.S. refrigerator market, Chinese appliance company Haier focused on basic, cheap—but reliable—products that didn’t demand state-of-the-art technologies. It sold small refrigerators for hotel rooms and students’ dorms—products incumbents had ignored—capturing 50% of the minifridge market. Nine of the ten largest U.S. retail chains now carry its products.
Dedicated Exporters
Leveraging their economies of scale, dedicated exporters set their sights on the external market. They first break into mass markets, where their low production costs give them an edge. Then they develop expertise with crucial technologies—often forming strategic partnerships and acquiring rivals—to migrate to specialized, high-value markets. Example:
China International Marine Containers bought Hyundai’s container-making operations in China for its manufacturing technology. In five years, CIMC captured half the world market for refrigerated containers. It’s the first in its industry capable of designing and manufacturing refrigerated containers for air, sea, road, and train transport.
Competitive Networks
These networks comprise hundreds of small, specialized, entrepreneurial companies located in one limited geographical area. Operating as a cohesive, interdependent entity, they take on world markets. With scant bureaucracy and overhead, they’re flexible, low-cost producers. They thrive in markets requiring quick responses to changes in demand. Example:
The 1,000-unit Shengzhou fashion network produces 250 million ties annually, supplying Armani, Pierre Cardin, and others. It codesigns ties with these fashion houses, using Internet-based collaboration software—and turns designs into products in 24 hours. It’s challenging European incumbents at the top of the market.
Technology Upstarts
The Chinese government built a large infrastructure for scientific and technological research, then required state-owned laboratories to obtain funding by commercializing their technologies. In response, research institutes have spawned companies and encouraged scientists to become entrepreneurs in emerging industries.
Ask any global manager, and he’ll wax eloquent about how Red China has transformed itself over the past 25 years into a latter-day Middle Kingdom, a business realm closer to heaven than earth. China is the fastest-growing market on the planet, after all. Between 1978 and 2002, the country’s GDP grew by 9.3% annually—three times faster than the American economy did—and its per capita income more than quadrupled from $231 to $940 a year. With a population of 1.3 billion, China has the most consumers in the world, too, and every company wants a piece of the action. Many multinational corporations entered the country in the decades after 1978, when the Communist government started to raise the bamboo curtain, and since China joined the World Trade Organization in December 2001, many more have swarmed into a market whose potential defies imagination.