Feature Article

How foreign companies can compete in China's high-tech market

The emergence of strong local high-tech companies is creating a formidable challenge for
multinationals seeking to grab a share of the Chinese market.
Ingo Beyer von Morgenstern
Web exclusive !anuary "##$
Lenovo, TCL, and Huawei are %ell-kno%n examples of Chinese high-tech companies
that have established a global footprint. Beyond these headline-making brands ho%ever
scores of high-tech companies&largely unkno%n outside China&are rapidly assuming
market leadership %ithin the mainland %hile 'uietly building the capabilities to go
global.
China(s high-tech sector is gro%ing at an impressive pace. )ver the past three years
revenues of its *## largest high-tech companies gre% by "$ percent annually more than
t%ice the overall market gro%th rate of *" percent and nearly four times the annual global
rate of + percent. )f these nearly "# midsi,e and large companies have gro%n at -#
percent or more a year&a remarkable pace for businesses of that si,e.
The rise of Chinese companies comes at a challenging time for the high-tech sector in the
rest of the %orld. .lo%ing core markets and pressure from investors to increase earnings
are forcing companies to turn to%ard China. /epending on the product category 0# to +-
percent of future gro%th in the global high-tech industry %ill come from emerging
markets %ith China expected to generate a significant portion.
1oreign high-tech companies in China find themselves up against a host of challenges2
limited demand gro%th in high-end product segments %here they tend to compete and in
%hich they are increasingly under attack from Chinese players3 severe pricing pressure3 a
tendency to overinvest leading to excess capacity3 high turnover of 'ualified local
management talent3 and difficulty managing 4oint venture partners.
Many foreign C5)s seem convinced they are doing the right thing. In addition to
utili,ing expatriate managers they have local managers on the ground source and
manufacture components in China and visit the country three or four times a year to
check on the business.
These actions though necessary %ill not be enough to %in in China. By applying their
tried-and-true product and business models foreign high-tech companies are unlikely to
earn the level of profits&not only from hard%are but also from after-sales parts
services and soft%are&in China that they do else%here. In mature markets for example
printer makers earn as much from the sales of cartridges ink paper and services as they
do from the printer itself. In China this model does not %ork as %ell since consumers
%ould rather refill an old cartridge or purchase a ne% lo%-cost copycat one. Many local
companies are available to provide maintenance services at a fraction of the price that a
foreign group %ould charge.
6 different set of dynamics is at %ork in China re'uiring foreign high-tech companies to
rethink ho% they compete. 1irst they %ill need to reduce costs severely&by 0# to -#
percent&to bring themselves in line %ith Chinese competitors. Many foreign players
believe they are getting a good deal on components sourced in China yet they often pay
*# to "# percent more than local companies. 1oreign companies in China often rely on a
single more expensive overseas supplier for a particular component because Chinese
suppliers cannot meet the design specifications. To reduce costs foreign companies %ill
need to design products that local Chinese suppliers can manufacture.
But cutting costs is only part of the e'uation. .ince many foreign high-tech corporations
may never be able to reach cost parity %ith their Chinese rivals they %ill have to think of
other %ays to create value. )ne %ay is to rethink their distribution system in China. In
5urope and the 7nited .tates consumer electronics goods are distributed mostly through
large retail chains. But these channels do not have the same scale or reach in China. To
get around this problem .ony distributes its notebook 8Cs through hundreds of stand-
alone shops and sales counters in consumer electronics malls. .etting up its o%n
distribution net%ork has helped .ony boost its share of the Chinese notebook 8C market
from 4ust * percent in "##" to more than 9 percent today.
1oreign companies should also leverage their global brands and marketing muscle in
China especially given ho% brand conscious Chinese consumers appear to be. In a recent
Mc:insey survey of consumers in China -- percent of respondents said they preferred a
famous brand %hen buying consumer electronics.
Most foreign companies operate at the high end of the market conceding the midrange
and lo%-end segments to Chinese competitors. But if multinationals %ant to build large
businesses on the mainland they %ill have to figure out ho% to operate in these much
bigger segments %ithout eroding their brand image. Motorola and ;okia have succeeded
in this area and continue to en4oy strong brands %hile occupying leading positions in
China(s mobile-handset market %ith phones priced from <## renminbi to =### renminbi
>?-# to ?**"#@.
Whatever strategy they pursue the %orld(s high-tech companies %ill need to think
differently %hen doing business in China or risk losing out on the biggest gro%th
opportunity of the century.
About the Authors
Ingo e!er von "orgenstern is a director in Mc:insey A Company(s .hanghai office.
This article %as originally published as BCigh-tech groups seek a ne% mindsetB in the
Financial Times on !anuary ** "##$.
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