The Maturation of Chinese Competition

China’s adoption of “capitalism with socialist characteristics” has transformed its economy from a state-run, planned system into a profit-driven system in which domestic companies now have incentives to compete against MNCs in the battle for the Chinese market. With their ability to successfully imitate international business practices, Chinese companies have chosen to implement a low cost, high quality strategy in their fight against MNCs. While domestic companies have already succeeded in capturing the low-end market, the quality of their products is now perceived to be approaching that of international brand-name goods, thus fueling appeal in the mass market. This does not bode well for MNCs that choose to pursue a high-end strategy because domestic products of similar quality are priced at a fraction of the cost of international brand-name goods. MNCs cannot compete in the low-end, volume market nor can they complete on cost in the upscale market as the quality gap is quickly closes. MNCs must stay ahead of their domestic competitors by speeding up product development and by relying on aggressive marketing, an area where domestic companies are still weak.

As Chinese companies continue to mature, however, they now aspire to build well known brands and quality products that can compete in international markets. Perhaps international growth is the natural byproduct of a capitalist system, but the notion of “face” which is so important to Chinese culture and the desire to improve the status of their companies internationally are strong factors influencing Chinese managers to expand their operations abroad. Just as domestic managers quickly learned to mimic international business practices by observing MNCs at home, many Chinese companies sought to continue their education by entering the tougher, more established markets first, such as Europe, the United States, and Japan. Not only would such endeavors provide more of a challenge, but it would allow Chinese managers to observe best business practices first hand. One of the ways Chinese companies succeeded in entering international markets was by focusing on niche segments that were either vacated or ignored by the competition due to low profit margins. Such a strategy prevented Chinese companies from competing head-on with a domestic leader and allowed them to gain a foothold in the market. But, perhaps one of the most important concepts Chinese managers were able to learn at home and transfer to their operations abroad was the notion of listening to the needs of the domestic markets. Chinese managers had learned from the mistakes of early MNCs operation in China and decided to employ local managers in order to remain responsive to the pulse of the market.

The competition between Chinese companies and MNCs will be an interesting interaction to watch play out on the global stage. Just as Chinese managers are learning more about international business practices from their MNC rivals and by expanding abroad, MNCs are also learning from earlier mistakes on how to successfully conduct business in China. As Chinese consumers gain more spendable income it will be interesting to see if Chinese companies can satisfy their growing desire for technologically advanced products or if there could be a window of opportunity for MNCs. Similarly, if the economies in Western nations continue down the road towards recession, perhaps the demand for cheap Chinese goods will only continue to grow. But, whatever the outcome, it is only too apparent that we will need to continue to learn from each other and that our futures are intertwined and linked.