By: Peter N. Rasmussen On: 2016-03-01
Low cost competition, relationship based business, reverse engineering, and fast decision making by Chinese competitors have troubled foreign companies in China for many years. The recent years of “rush to the mid-market” has made foreign companies more competitive and kept them alive – but it has not entirely secured their successes.
Admitted, Western companies will never be able to entirely achieve Chinese cost levels. It is not in our culture. But there may be good news for those who have succeeded in bridging at least part of the gap… China’s slowing growth may be a potential game changer for these companies. With a more evenly leveled competitive field, other competition parameters are bound to blend into the mix of critical success factors.
Before Chinese products are sold at 50% price for 80% quality. The strong RMB and rising wages and social insurance cost in China have leveled the competition field somewhat. Now the picture is much more balanced. Maybe like 75% price for 85% quality.
The recent anti-corruption movement in China coupled with the relative openness brought about by the internet are factors taking their tolls on relationship based deals. Not to say that foreign companies are winning these deals in any significant scale, but at least the market is becoming more transparent and regulated.
The sharpest edges of technological advantages held by Western companies have already been eradicated by decades of reverse engineering and now also more traditional R&D by Chinese companies. Significant future potential gains by Chinese competitors in this field are becoming more difficult as the larger gaps are closing in.
With top-controlled organizational structures many Chinese companies have been able to make decisions much faster than Western companies – but often on a less informed basis. In a fast growing market like China the past 25 years, the cocktail of “low cost – relation based dealing – high speed decision” has been vicious to Foreign competition. This combination typically trumps both quality and advanced marketing. But in a market with slower growth it may be a different story. Here the traditional deeds of deeper market understanding and a broader marketing mix may prevail.
The internet allows instant and real-time monitoring of almost the entire Chinese economy. That goes for both Chinese and Western companies. But an area where Western companies often have an edge, is the ability to process and make sense out of market information. And there is an explanation to this. Where the West went through centuries of “craftsman and merchants societies” followed by a century of industrialization - China moved from a slow and inefficient agriculture based planning and allocation economy straight to super-growth industrialization in one giant leap in just two decades.
If it is difficult to imagine what China looked like 25 years ago when watching the skyline of Shanghai today, then that is nothing compared to how difficult it is for Westerners to understand what business in China was like 25 years ago.
Until the mid 1990s most Chinese companies did not have sales departments – or purchasing departments for that sake. The planning economy worked as an allocation system from the state level down to the individual company where there was little need for spending efforts on buying or selling. The main concern of the Chinese companies was to fulfill the “quota” set by the Plan. Chinese companies had “supply departments” covering both purchasing and sale. And their main tool to securing inputs and outputs was relationship building and wining and dining.
One important remain from the planning economy is that Chinese companies set their prices “bottom-up” by adding a minor profit to the cost price. In the West – in our marketing driven economies – we set prices “top-down” by asking “what are customers willing to pay?”
In the time since conversion to market economy Chinese companies have to a large extend gotten used to just “filling gaps” in the fast growing market by adding capacity and keeping costs low, while herding their relationships. Although marketing as we know it is not new to the Chinese – it is also not something deep-rooted in their business culture. For most Chinese companies marketing can be classified as “reaction” – more than “pro-action”.
It wasn’t until the mid 1990s that the Chinese invented word for “marketing” in their language!
While the ability to compete at close-to-Chinese cost level with “acceptable quality” is still an extremely important success factor for Foreign companies in China’s industrial market place, economic slow-down and increased transparency are handing Western companies a better-leveled competitive landscape. Concepts such as for example costof-ownership and comprehensive services packages may very likely win terrain as the economy tightens up.
For Western companies a sophisticated marketing mix is not something new. It is “business as usual” in our home markets. Chinese companies have traditionally been used to less sophisticated marketing strategies based on mainly relationships and ”cheap-cheap-cheap! go-go-go!” mentality. While elements of the more sophisticated strategies may be easy to copy – the spirit behind these may not.
Peter N. Rasmussen
Founder and Chairman of Asia Base
March 01, 2016