Competitive China: Intensified Competition from Local Enterprises

Amid the challenges of China’s economic slowdown and rising business costs in the country’s megacities and lower-tier urban areas, multinational corporations should also expect intensified competition from their local counterparts.

Domestic firms, especially state-owned enterprises (SOEs) exempt from the country’s Anti-Monopoly Law, are often able to operate within the country under favorable business terms. Many Chinese privately-owned enterprises (POEs) are also rapidly moving up the value chain with improved research and development (R&D), localized market expertise, and enhanced branding. Leveraging both the engineering capabilities developed during the last two decades and the eroding but competitive low cost structures, Chinese firms enjoy industry advantages with a medium level of technical difficulty.

Small- and medium-sized local POEs usually begin with the initial goal of expanding market share in China and then gradually gain wider brand recognition. Some firms that have been able to swiftly attract sufficient managerial and technical talent have even risen to become global competitors, creating further threats to multinationals in markets outside of China.

ChineseCompaniesGlobalCompetitiveness-FrontierStrtGrp

(Sources: Frontier Strategy Group analysis, Fidelity Asset Management Research)

One rapidly expanding Chinese technology firm that has exerted pressure on multinationals in China’s smartphone market is Xiaomi. By selling low-cost phones with attractive specifications and exploiting an online flash sales platform to pre-empt competition in the domestic market, Xiaomi achieved 150 percent year-on-year growth in the last quarter of 2014 and pushed Samsung’s market share in China from 18.8 percent in Q4 2013 to 7.9 percent in Q4 2014, according to the International Data Corporation. With more than 60 million units sold in 2014 in China alone, the Chinese smartphone maker is now seeking global expansion.

Chinese firms are proactively expanding their local R&D centers and globalizing innovation, and China now ranks first among upper-middle-income nations as the most innovative country per income group in the 2014 Global Innovation Index. The country is also a leader among middle-income economies for its quality of innovation, ranked by quality of universities, patent families, and citable documents.

Although concern over China’s economic slowdown has been building, the nation still tops the list of fastest-growing economies, according to a recent Bloomberg survey of economists, with an estimated GDP expansion rate of 7 percent in 2015. With tremendous business opportunities and intensified local competition in China, multinational corporations must maintain their competitive advantages in technological development and localize strategies in market segmentation, product design, distribution channels, and talent management.

FSG’s analytical framework emphasizes the need for multinationals to gauge the intensity of local competition in China. FSG encourages our clients to revisit their competitive strategies for the Chinese market and to conduct frequent analyses of local players to stay ahead of the game.

Preparing Multinationals for China’s New Normal through 2020:

This blog post is the fifth of a six-part FSG insight series on China’s economic outlook in the next five to six years and its implications for multinationals’ mid-term strategies. In this series, I will elaborate on some of the key opportunities and risks that multinational corporations will need to monitor as they develop their strategic positions in China through 2020. Next week’s update: “Stringent China: Heavier Government Scrutiny.”


For more on FSG’s outlook for China 2020, FSG clients can visit the client portal. Not a client?Contact us to learn more.

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