Understanding Trends That Drive Change

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In the third quarter of 2012, the Chinese economy grew 7.4 percent.  This is the lowest growth since 2009.  However, there are other indicators in China that give a positive outlook.  Beijing reported a 9.2 percent increase in industrial output and retail sales increased by 14.2 percent.  

The Chinese economy is evolving.  The focus on sustainable growth and higher-value-added business is increasing thereby decreasing the focus on low-cost manufacturing.  In addition, the infrastructure, growth on exports, and domestic consumption help drive the economy.  Multinational corporations may be nervous with the economic situation in China; however, they can rest knowing China is a significant source of opportunity if they adapt their strategies.  To accomplish this, companies need to understand the trends driving these changes. 

Short-Term Challenges

China’s domestic demand is growing.  However, it will come from regions that have been ignored by multinational companies.  The wealth is moving away from coastal areas and toward the interior and western provinces.  This sectors being affected by this trend are consumer goods, automotive, and industrial. 

Chinese and multinational companies will need to realign their strategies and business plans to adapt accordingly.  By entering into lower-tier markets, implementing a “go down” strategy, they can expand their business.  This will necessitate changes to the traditional go-to-market model and core elements of the customer value proposition.   Building national logistic and marketing networks and linking inland and western regions to the rest of the country are strategies that need to be considered.  Foreign companies can benefit from strategic alliances with Chinese companies or any other players in the market to help with this shift. 

There is still a widening talent gap so short-term execution challenges are inevitable.   Companies should focus more on developing and retaining high-potential people and less on recruiting the right people.  This can be accomplished by recruiting people through structured talent management programs and committing long-term to their China strategy. 

Long-Term Competition

While Chinese customers are willing to pay more for high quality and they have more of a brand loyalty than in the past, multinational companies will be limited by ambitious local entrepreneurs that are quickly acquiring the technology and know-how to produce high quality goods equal with multinationals.  Highly differentiating your product will be a key to allure customers to your brand. 

Companies will need to find opportunities to transition with the shifts.  As such, multinationals should focus on one of the following courses of action:  double down, reposition, wait and see, or pullback.   Some companies, like General Motors, anticipated the shift to inland regions and used the opportunity to aggressively compete with pricing.  General Motors introduced a budget brand called, Baojun (treasured horse) specifically for this market.   This is a great example of doubling down.   Damco, the logistics arm of A. P. Moeller-Maersk Group, recently opened new offices in western China and acquired several businesses in response to the changing demand.  This is a great example of repositioning.   If a company can afford the wait and see option, then it can consider more careful approaches to the market.   Pulling back can be temporary or final.  However, companies need to rethink their strategy if they haven’t gained market share.  Several well-known companies have failed in China.  They then pulled back to regroup. 

Companies that want to build a competitive edge in the Chinese market will need to move the value-chain activities to China.  Research and development and product development should be moved to China while simultaneously maintaining the global marketplace and leveraging global capabilities.  They will also need a strong knowledge of the local competitors and a deep understanding of the local context.  Investing in product differentiation and competitive necessities will be the driving forces of competing in the Chinese market.  www.strategy-business.com 

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