Among the top business challenges MNCs face in China, rising local competition is a critical obstacle creating heightened pressure on multinational companies’ revenue and profitability growth. According to the US-China Business Council survey of 106 MNCs in China, competition from local companies has been ranked among the top four challenges since 2011, and was identified as the most critical challenge in the past two years. Here are two main reasons why this pressure has intensified in China over the last several years:
- Chinese companies are rapidly moving up the value chain through development of technology and marketing capabilities
As the Chinese government heavily invests in domestic R&D capacity and encourages Chinese firms to improve technological know-hows via the indigenous innovation initiative, local players have seen abundant opportunities to acquire advanced technologies. Enjoying upgraded quality and continued cost advantages, many state-owned enterprises and smaller private companies are proactively moving up the value chain; some have even started to expand their global footprints and further improve international engineering capabilities. With 98 Chinese players on the Fortune Global 500 list in 2015, local players have been gradually enhancing their brand equity at home and abroad.
In addition to technological advancement and localized marketing capabilities, numerous Chinese competitors have been able to poach key talents from MNCs, which creates further obstacles for multinationals to expand in China. Many Chinese professionals, especially younger talents, have been lured by the increasingly appealing local salary and benefit packages, and have started to value the growing brand equity of domestic companies.
- Industry protectionism hinders MNCs’ growth, while ineffective regulatory enforcement leaves room for local players to exploit cost advantages
MNCs across various industries are often faced with heavy pricing control and compliance regulations in China, including anti-corruption and anti-monopoly laws. The aggressive push by the government to foster indigenous innovation and encourage local partnerships has also led to additional IPR concerns for MNCs. In contrast, some local companies don’t necessarily comply with regulations in land, labor, and raw material standards, and are thus able to benefit from tremendous cost advantages.
In the long-term, industry learning and upgrading will be beneficial for responsible businesses in China, but in the short-term, many MNCs will still suffer from a tilted playing field, and will need more investment and patience to educate local regulators and customers.
The challenges from local competition are unlikely to diminish in the near future, as foreign and local businesses have all been eyeing the country’s growing middle segment with tremendous potential for market expansion. In an immature Chinese market, the relatively high pricing sensitivity and low quality awareness in the middle segment continue to create difficulties for MNCs to adapt to the local market environment with their premium-based products and services. In the meantime, many Chinese players have been successfully copying MNC product and service models, effectively developing local innovation, and steadily bridging the quality gap to tap into the middle market.
In order to address business problems from intensified Chinese competition, a few MNCs have developed effective tactics in four strategic areas: market positioning, product localization, local partnerships, and organizational efficiency. We will be sharing some successful practices in a follow-up blog post next week.