As we explained in a previous blog post, multinationals in China are experiencing heightened pressure from local competitors. This is largely due to two reasons: 1) Chinese companies are rapidly moving up the value chain through development of technology and marketing capabilities; 2) Industry protectionism hinders MNCs’ growth, while ineffective regulatory enforcement leaves room for local players to exploit cost advantages.
In the face of intensified Chinese competition, MNCs are primarily seeking localized solutions in four strategic directions in China: market positioning, product localization, local partnerships, and organizational efficiency.
Here are four successful tactics that MNCs have adopted in these strategic areas to further expand in an increasingly competitive Chinese market:
- Position: Offer a light version of your service model to engage less sophisticated Chinese customers
It has become essential for multinationals to closely examine a re-positioning strategy to adjust to a less mature market. One good example is from Company Alpha, a multinational hygiene product and service provider to hospitality businesses. Offering a comprehensive service package, Alpha found it difficult to compete with the “good enough” products of local players in China, where Chinese hotels and restaurants are used to a transactional relationship based on price sensitivity and specific product requirements.
To strike a balance between premium services and cost-effective products in the middle segment, the company adopted a re-branding and re-positioning strategy by purchasing another brand to scale down the service packages. Alpha also started to train restaurant managers at a regional level in China (10-20 stores altogether) to help them better use its products and improve overall industry hygiene standards.
- Product: Adjust product portfolios and market yourself as a sophisticated service provider when local competitors possess huge regulatory support and dominate the market
Company Delta is a global manufacturer of medical devices. With fierce local competition in pricing and an arduous foreign device registration process in China, the company had been experiencing declining sales. In order to continue serving the market in a manner that didn’t require them to beat out Chinese competitors in the regulatory approval game, Delta adjusted its product portfolio in China and shifted investment focus to niche consumable products, such as its surgical instrument cleaning chemicals, with a good brand reputation.
In addition, Delta developed internal capabilities in the value-added market. For example, it increased investment in the maintenance and repair of automated medical devices. By focusing more on the value-added market with high technical requirements, Delta was able to tap into a less competitive new market segment.
- Partner: Engage local partners and leverage their distribution networks, cost effectiveness, and regulatory advantages
Under a very fragmented distribution landscape in China, leveraging local channel networks has become one of the most critical incentives for MNCs to partner with Chinese players. Tian Tian Quan, for instance, is an O2O (online-to-offline) channel model initiated by a major local agricultural company. A few MNC players have identified the huge business potential behind the local network, and are proactively working to establish marketing and channel partnerships using the local platform.
As Chinese companies have advantages in cost control, and preferential registration regulations result in much shorter timelines for locally manufactured products in China, many MNCs are also able to significantly ease cost pressure and avoid extended product registration timelines by acquiring local players or forming local joint ventures.
- Process: Differentiate each of your brands’ value propositions and identify coverage gaps by creating completely insulated teams
While serving customers in the premium segments is important, a growing number of MNCs have also been exploring ways to optimize customer segmentation and tap into new markets in China. Company Iota is a large MNC player in the power generation space, who previously acquired a local brand Kappa to target the mid-tier customers. However, it made the mistake of associating the brand with the premium Iota brand, which made it difficult for Kappa to compete in the middle/low-end market.
Iota later completely insulated the local Kappa brand from the corporate brand by creating two different teams for sales, marketing, and technical support. By dividing teams by brand, the company was able to see the insufficient coverage of its own Iota brand, and clarified each brand’s value proposition as they served different segments in China.
With the rising local capabilities and complex regulatory barriers in China, MNCs will continue to experience rapid growth of competition from local players. With this in mind, executives should take into consideration the four critical P’s, and develop more localized strategies in order to gain competitive advantages and outperform local players in China.