‘Good enough’ is no longer good enough for Chinese consumers. Present day consumers expect a good product for a fair price and foreign companies in China are losing the battle. Shipping goods from abroad to China is costly, requires long lead-times and is hindering a company’s competitiveness in the local market. Producing and selling locally is becoming imperative to compete with local companies, but are the risks too high?
It’s no secret that the Chinese market is growing and will soon be the largest market in the world. Luxury brands have seen their revenues sear in the past years– take Gucci as an example – and foreign industrial companies came to China many years ago to aid in China’s rapid development, such as helping to engineer its high-speed railway network spanning from Tibet to Guangzhou and Beijing.
In the country’s early stages of development many foreign-owned companies active in China sold products of inferior quality to the Chinese consumer, when price was considered to be more important than any other aspect. However, recently the domestic purchasing power has risen dramatically and consumers are no longer looking for ‘dumbed-down’ Western products of low quality and are instead demanding products that are better than “good enough”.
Quality is becoming more important and local companies have picked up on this trend, but have MNC’s too?
Localization is key for competing in China
When Volkswagen came to China in the 1980’s they did not develop new models for the Chinese market, instead they produced older models for the local market that were no longer produced in Europe. Back then the Chinese auto market was still in its infancy stage and a simple car was sufficient to fulfill the needs of the consumer. But China has changed a lot in the past thirty years and consequently now demands a different strategy. Cheap, low-quality goods are no longer in high demand. Instead ,people are now expecting high quality products for a fair price.
In other words, good enough is no longer good enough. Although many foreign firms still posses key advantages over their Chinese counterparts, they face fierce competition from local firms that design, engineer and manufacture locally, therefore benefiting from a strong cost advantage.
Another aspect that many MNC’s are falling behind in is local product adaption; they seldom adapt their products to fit the local needs and wants, often resulting in a product-market failure. McDonalds is a good example of this; the power of McDonalds lays in the standardization of its products, wherever you go you will be able to find a Big Mac in a McDonalds restaurant that tastes the same way as back home.
Although being able to offer the same products all over the world is a great strength, it is not a guarantee of success in China where the majority (in the 90’s) never heard of McDonalds let alone ate in one of their restaurants abroad. McDonalds made the mistake of not adapting its products to the local taste, which competitor KFC did. KFC’s localization strategy included offering rice meals and chicken flavored with Chinese herbs, amongst others. This eventually resulted in KFC gaining a large market share in the fast-food industry and the brand gained significant popularity within China.Nowadays KFC is found on every street corner and McDonalds only recently picked up its game and started changing its menu, but it took the company many years before finally adapting to the local market needs.
Local companies are very in touch with their consumers and produce products that seamlessly fit in the Chinese market. If you want to be competitive, avoid the trap of assuming that if your product works in the EU, US or anywhere else it will also work in China. Remember, product adaption is imperative to success in China. Hence, our advice is to first carefully consider whether or not your product needs to be changed and consequently make changes accordingly.
Review your current strategy: will it work in China?
Your current strategy most likely will not work in China. China’s unique business environment often requires a different approach and demands a review of strategy. Here are several principles that can help foreign companies compete in China and might prove to be of help to your business.
- Design a mid-market business model. Adapt your products to fit local market demand and work together with Chinese consumers to find ways to improve your product(s). In addition, consider offering alternative payment solutions to consumers and businesses that do not have the funds to pay you directly.
- Localize (part of) your operations. In order to be competitive you need to be able to offer a good product for a good price. Shipping your products from abroad to China will incur high costs, longer lead-times and makes it challenging to give high quality after-sales service. By localizing your production you can avoid paying high freight costs and steep import-tariffs, enabling you to offer a better price while receiving a higher margin. In addition, a local sales office would benefit your sales and after-sales.
- Seek strategic and selective partnerships. Due to China’s complexity and size, most SME’s will need to partner with local distributors and key players in their respective industries. This helps in providing better after-sales service, reaching remote locations, gain market access in key industries, negotiate with regulators and government bodies and to set a national footprint. It is however of grave importance to be very selective in choosing your distributors, for they will also act as promotion for your company in regions where you are not visible yourself.
- Establish a strong local organization. In addition to localizing part of your manufacturing and sales in China, it will most likely be necessary to attract local talent to manage your operations. For many SME’s it will already be a hard pill to swallow to change their current strategy and products for a new market, let alone also give away more control to local staff. However, time and time the localization of management and key business units has proven to be most effective in gaining success in China.
A step-by-step approach
We are often told by SME’s “I am not sure about setting up a factory or office in China, the opportunity costs are too high; the required investment is quite substantial, both in financial terms and time wise.” We agree. Unless you are a large company that can easily write off a potential bad investment, we strongly recommend taking a step-by-step approach.
As late Deng Xiaoping, who is famous for having spurred China’s economic reforms, once said “crossing the river by feeling the stones”. First test the waters, and then consider taking the next step. Consider working in a shared office, starting up only with local sales and determine whether or not your product is liked or if it requires modifications. And most importantly: dedicate sufficient resources to your business in China, it’s a large but complicated market and it requires your attention and devotion.
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