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¬ 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 ** "##$. #elated Thinking 8rotecting intellectual property in China Detting sourcing right in China 6 guide to doing business in China Eestructuring alliances in China .ite Map F Terms of 7se F 7pdated2 8rivacy 8olicy F mckinsey.com Copyright G *=="-"##$ Mc:insey A Company Inc.