Competing in China’s Local Market
I finally had a chance to meet Dan Harris of the Harris & Moure law firm and one of the creators of China Law Blog: China Law For Business, a leading blog that focuses on legal matters in China. Dan and I have communicated over the past year by e-mail and through our respective blogs, but my trip to Seattle last week provided our first opportunity to get together in person.
Among the many things we discussed, we talked about my observation that every product has two markets in China: a high-priced/high-technology market, and one that is characterized by low price and low technology. Dan promptly followed up our breakfast meeting with an article entitled. “Which Comes First, The Wealth Or The Low End?” Dan’s post covers the basic principles, and I have written on this subject many times, so I won’t repeat all of my arguments here.
However, at the end of his post, Dan posed the following questions which I would like to address:
- Can foreign companies compete on the low end in China? Obviously this is going to vary by industry and I would love to hear from people in as many different industries as possible.
- Should foreign companies even bother trying to compete on the low end in China and, if so, in what industries?
- Is there enough high-end business in China now and is that high end growing fast enough such that Western companies can ignore the low end?
- Or, will a failure to garner the low end now preclude garnering any end later?
Dan’s article and questions sparked a spirited discussion among his readers. I encourage you to read the article and the responses to it in their entirety.
A discussion of China’s two markets and how this phenomenon is already impacting global industries is an important part of every presentation I give on China. When doing so, I always make the following points.
Ignore China’s local market at your peril!
Whether a company chooses to try and compete with Chinese companies in the country’s low-end market or not, it should clearly understand that this market exists, and it should have a clear view as to how its future development may threaten the profitability and future potential of its existing business in the high end. Make no mistake about it: it will have a major impact.
Low price does not have to mean low cost.
Many of the comments on Dan’s article focus on the fact that local Chinese companies often get away with not paying taxes, while foreign-invested companies must comply with all tax regulations or risk being shut down. Naturally, this provides local competitors with a big cost advantage that is unavailable to foreigners.
But, low price does not necessarily mean having the lowest costs in every category. Often, foreign designed goods are not competitive in China’s local market simply because they are over-engineered for the market and provide features that Chinese consumers do not necessarily want and certainly can’t afford. It may be as simple as developing a simpler, less expensive, more affordable design for China. This is what I mean when I say that companies cannot simply bring their products “as is” to China. They have to tailor their products and business models to the China market.
It’s about affordability, not necessarily low cost.
Although cost is an important factor in China’s local market, there is ample room for foreign companies to compete successfully and differentiate their products from the local competition in terms of quality, technology and service–as long as the prices of their products are affordable. Even in the highly cost-conscious local market in China, many customers prefer to buy better quality products that are affordable, and will shun shoddy products, although they may be cheaper.
In summary, I believe that foreign companies must learn how to compete in China’s local market. If they don’t, they give up a big part of the China opportunity and they risk becoming increasingly vulnerable to local competition in their global businesses
For those who are interested in learning more about my views on this subject, I suggest you refer to the chapters in my book, Managing the Dragon, which discuss “China’s Lower Cost Perspective” and “China’s Two Markets.”