VioletStar October 26th, 2006
China’s high-tech sector is growing at an impressive pace. Over the past three years, revenues of its 100 largest high-tech companies grew by 26 percent annually, more than twice the overall market growth rate of 12 percent and nearly four times the annual global rate of 7 percent.
However, foreign high-tech companies in China find themselves up against a host of challenges: limited demand growth in high-end product segments, where they tend to compete and in which they are increasingly under attack from Chinese players; severe pricing pressure; a tendency to overinvest, leading to excess capacity; high turnover of qualified local management talent; and difficulty managing joint venture partners.
These companies usually employ local managers on the ground, source and manufacture components in China, and with the CEOs visiting the country three or four times a year to check on the business.
By applying their “established” product and business models in the west, foreign high-tech companies are unlikely to earn the level of profits—not only from hardware, but also from after-sales parts, services, and software—in China that they do elsewhere. 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 work as well, since consumers would rather refill an old cartridge or purchase a new, low-cost copycat one. Many local companies are available to provide maintenance services at a fraction of the price that a foreign group would charge.
In order to compete in China market, foreign high-tech companies need to rethink their business model. First, they will need to reduce costs severely—by 30 to 50 percent—to bring themselves in line with Chinese competitors. Many foreign players believe they are getting a good deal on components sourced in China, yet they often pay 10 to 20 percent more than local companies. Foreign 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 will need to design products that local Chinese suppliers can manufacture.
But cutting costs is only part of the equation. Since many foreign high-tech corporations may never be able to reach cost parity with their Chinese rivals, they will have to think of other ways to create value. One way is to rethink their distribution system in China. In Europe and the United States, 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, Sony distributes its notebook PCs through hundreds of stand-alone shops and sales counters in consumer electronics malls. Setting up its own distribution network has helped Sony boost its share of the Chinese notebook PC market from just 1 percent in 2002 to more than 8 percent today.
Foreign companies should also leverage their global brands and marketing muscle in China, especially given how brand conscious Chinese consumers appear to be. In a recent McKinsey survey of consumers in China, 55 percent of respondents said they preferred a famous brand when buying consumer electronics.
Most foreign companies operate at the high end of the market, conceding the midrange and low-end segments to Chinese competitors. But if multinationals want to build large businesses on the mainland, they will have to figure out how to operate in these much bigger segments without eroding their brand image. Motorola and Nokia have succeeded in this area and continue to enjoy strong brands while occupying leading positions in China’s mobile-handset market, with phones priced from 400 renminbi to 9,000 renminbi ($50 to $1,120).
source: “High-tech groups seek a new mindset” in the Financial Times on January 11, 2006.
