2. Educate the right customer
Education is clearly important when selling at a higher price point vs local competitors. But who do you educate? The President of China at a leading company in the paint industry says: “Our paint can last 15 or 20 years on a new building. You can use a cheaper paint, but in 5 years you will have to repaint and it will cost more! The problem is: [real estate] developers don’t care, they won’t be there in 5 years!”. So the question is: who should you educate about your differentiators?
In some cases the answer is clear, especially if your differentiator is relevant to your direct buyer or, for B2C companies, to consumers. For example, food and beverage multinationals operating in China can capitalize on safety to capture demand. As a senior executive from a leading dairy company mentioned: “Consumers are willing to pay a premium for imported milk because they are still skeptical about safety of local milk. […] Food safety shouldn’t be a differentiator, but it is one in this market”.
However, the right customers to educate might be more distant, for example one step away in the value chain. A leading healthcare company in the diabetes space provided an interesting example. Traditionally, companies in medical devices (including diagnostics) partner with doctors to increase awareness and compliance. “That’s the right approach in most markets”, comments the President of Asia Pacific, “because people respect the advice of experts. However, in India we went directly to consumers, as we believed that it would be a most effective way to grow awareness and drive compliance.” The results? “Today we are the number one player, with a big distance from number two.” Educating the right customer might require some creativity and bold moves, but the payoff can be significant.
3. To remain cost-competitive, start from people and culture
“You can differentiate yourself as much as you want”, comments a senior executive with 25 years of experience in a global industrial conglomerate, “but if a large share of volumes comes from commoditized products, you have to relentlessly work on your cost base.” Most senior executives in Asia today recognize that building scale and minimizing the cost structure is vital to remain competitive. However, cost excellence is typically associated with supply chain optimization, sourcing strategy, lean organizations, etc. In our experience, the difference is made with the right people and culture.
“For some time, we couldn’t create products to compete with local players. We gave a budget and specs to the best engineers, and they said: ‘It’s impossible!’”, says the President of Asia Pacific at a chemical multinational. “Then we gave the same resources to the local engineering team. In 2 weeks we had a competitive product.” Minimizing costs requires a specific mindset and pervasive culture. As a senior executives in the medical diagnostics sector puts it: “We want to come up with affordable products to address the mid-tier market, but then we end up with the same frills, because that’s what we are so used to.”
Segmenting the organization internally based on the external market segmentation (e.g. separate engineering, sales, product management teams, etc) seems to be a fairly common approach. Here is an extreme case: “We have a trucks business and a wheel-loaders business”, explains the President China of a leading automotive multinational. “In trucks we play only in the high end market, but wheel-loaders is an entirely local industry; we acquired a wheel-loader manufacturer and we manage that business separately as a local company.”
While this strategy has its own limits and downsides (e.g. realization of synergies), it also has some side-benefits. For example, it helps to work around common post-merger integration challenges, such as harmonization of incentive structures. MNCs acquiring local companies are often faced with a very different system of values and incentives, challenging to integrate with their own. Our Director of Research, Shijie Chen, provides an explanation of such differences: “Many people think Chinese companies should have a more socialist leaning corporate and compensation structure. This is probably true for state-owned enterprises and civil services, but definitely not the case for private Chinese companies. The reality is that most privately owned Chinese companies are very market-oriented in a ruthless way, or Capitalism in its raw form. Creating a supportive working environment, building work life balance, providing training and development to employees (things MNCs would pay a lot of attention to) are much less important for private Chinese companies. So for example, it is common to see a “low base + high variable” compensation structure in this environment.”