How MNCs are responding to mid-market innovators

Shenzhen-based Mindray Medical International Co., Ltd. is one of the largest medical equipment manufacturers in China. Founded in 1991, the company provides professional services to major hospitals in China, especially those for basic medical equipment. Insufficient hospitals in rural areas. The B2B (business-to-business) business produces reliable, versatile and innovative medical devices, and spends 10% of its revenue on research and development each year. At the beginning of the 21st century, with the rapid development of China's economy, Mindray's development goals also increased. The company has performed well in the global medical equipment market, rapidly gaining market share by providing monitoring systems and medical imaging systems that are 40% lower than those offered by mature multinational companies. In 2010, Mindray successfully expanded its business to 140 countries with an annual revenue of over US$700 million.

Nowadays, there are a large number of innovative companies similar to Mindray in China. At the beginning of their business, due to the huge competitive pressure, they started with a low-cost route and focused on the middle and even low-level markets in China, which forced them to focus on cost control. , streamlined structure and quick and flexible response to market changes. After years of development, such innovative companies have rapidly expanded their business networks from domestic to global, and they are now posing a huge threat and challenge to multinational corporations.

Mature multinationals are under attack

Middle market innovative companies are emerging B2B companies that are good at launching low-cost but high-quality products and are affecting the global competitive landscape, including agriculture, construction, healthcare, transportation Transportation, etc., but many companies, especially foreign companies, are unaware of the existence of such companies. On the whole, as China gradually develops into one of the largest economies in the world, innovative enterprises in the middle market will become the main force in the next stage of economic development.

Innovative companies pose a potential threat to more established global manufacturing companies. This is not alarmist. In the capital and scale-intensive B2B sector, where branding is not the focus, established multinationals in this sector are particularly vulnerable to mid-market innovative companies.

While such companies can also appear in other markets such as India, Brazil, Indonesia, etc., so far they have been largely Chinese. This is due to the uniqueness of China's business environment: large and complex consumer base, fierce competition, high innovation, low labor costs, distinctive regulatory environment (a constant balance between market opening and control), infrastructure development and the rapid development of public services. These characteristics provide a huge development platform for innovative enterprises in the middle market. Compared with foreign competitors lacking Chinese market experience, they have higher competitiveness in the local market.

Thousands of mid-market innovative companies emerge every year in emerging cities, such as those in the interior and cities rising on the fringes of metropolitan areas. Such businesses typically start their domestic business first and target customers who want to buy a product or service with satisfactory functionality and quality at a lower price (compared to imported products).

While these mid-market innovative companies skillfully compete on price, these companies also use innovation as their competitive edge, continuously improving products, processes, business models, and narrowing their stability with leading global competitors And gaps in performance, sometimes at a staggering rate at which they are catching up with the leaders. At the same time, their product costs are lower and they respond flexibly to domestic demand. Such companies, for example, do not simultaneously roll out their business networks across the country; instead, they understand that the pace of development varies from region to region, so they focus their operations on areas with greater demand for low-cost products.

Taking the construction equipment industry as an example, the rapid development of housing construction and infrastructure construction in China involves a large number of subcontracting. Hundreds of small businesses are involved in projects of all sizes. Most Chinese construction subcontractors only consider short-term plans, requiring equipment that can be put to work immediately and scrapped in five years or less. Emerging construction equipment manufacturers sell low-cost products that don't require high maintenance costs, but don't last long and are replaced within a few years. Such manufacturers focus on fewer product categories, invest only in the features they need, and are competitively priced. The products they produce may not meet the market standards of Canada or Denmark, but they are of high quality in the Chinese market. It is precisely because of the uniqueness of the Chinese market that non-local heavy machinery and equipment manufacturers such as Caterpillar (United States), Liebherr (Germany), Komatsu (Japan), etc. with more mature business models are more difficult to penetrate this part of the Chinese market. .

Certain mid-market construction equipment companies are slowly growing into multinational corporations. For example, Sany Heavy Industry Co., Ltd. (founded in Changsha, the capital of Hunan province, in 1994) became the world's largest manufacturer of concrete pump trucks in 2009, with total revenue of nearly $8 billion in 2010. In 2012, Sany announced plans to acquire Germany's Putzmeister, the world's second largest concrete equipment manufacturing giant, and it has established factories in the United States, Brazil, India, Germany, and a research and development center near Cologne, Germany. . Other construction equipment manufacturers have also begun to expand overseas, such as Zoomlion, Xugong Group and Shandong Heavy Industry Group. One thing these companies have in common is that they all initially served the fragmented Chinese construction market.

How to choose the best strategy

Many large multinational corporations are unaware of the threat posed by middle-market innovative companies. Most multinational corporations headquartered in the United States or Europe obtain information through their sales offices in China, and many are unaware of the existence of emerging middle-market innovative companies. Even when some of the more established multinationals are aware of the threat, they find it difficult to respond appropriately. They mistakenly believe that there is still a lot of time to adapt to the status quo, and as the Chinese market continues to develop, their products can maintain a stable market position. Based on this understanding, these multinational corporations have generally adopted three strategies, but basically none of them have achieved ideal results.

The first strategy: Ignore risks and completely avoid competition in the Chinese market. However, China's middle-tier market is very large. These innovative companies can accumulate experience in this market first, and then quickly enter the traditional market of mature multinational companies with their capabilities and price advantages. Sany Heavy Industry has done it.

Second strategy: Continue to provide their global products in the Chinese market, waiting for emerging markets such as China to improve product quality requirements. For example, a construction equipment manufacturer from a developed Western market might sell high-priced products in China, believing that sooner or later Chinese subcontractors will gain scale and access to long-term financing, eventually starting to buy higher-priced, more durable, better-quality products product.

But this won't happen anytime soon. Even though China has become a major luxury consumer market, people may pursue Mercedes-class quality when buying cars and other goods, but this pursuit will not extend to products such as bulldozers, wind engines and medical equipment. Even long-lasting products fail to impress consumers. The barriers to entry into the low-priced product market are not high, and competition in the Chinese market will continue to focus on production capacity and price.

Strategy Three: The "Good Enough" Strategy, Bain & Company's Global Chairman Orit Gadiesh, and Partners Philip Leung and Till Weiss Group (Till Vestring) carried forward the strategy. (See "China's New Battlefield of 'Good Enough'," Harvard Business Review, September 2007.) Companies adopting this strategy will continue to focus on the high-end market, but at the same time introduce lower-priced products that are 'good enough' for the middle market . They cut costs by simplifying some features, but try not to disrupt sales of existing high-end products. In fact, two or more sets of different business models are required for different market segments. The most direct way is to acquire local brands or establish partnerships, and directly use the acquired brands or partners' brands to conduct business in the mid-tier or lower-end markets.

For example, truck manufacturer MAN SE (Augsburg-Nuremberg Machine Works AG) has established a joint venture with Sinotruk and has adopted a strategy of both since the beginning of 2011. The Shandeka brand is adopted in the Chinese market, and the Sitrak brand is adopted in other emerging markets in Asia, Africa, the Middle East and other regions. This strategy enabled MAN to adopt different business models and sell products at different price points to different markets.

In a strategy that does both, it is generally more effective to employ separate but parallel business models. This is certainly wiser than ignoring the middle market altogether, a strategy that allows these companies to compete in the middle market. However, if you want to be successful, it is very difficult. Marketing for two brands is more complex and expensive than single-brand marketing. Resources may be wasted, the network of joint ventures and other partnerships established may not be coherent, and these issues may not be effectively addressed at all times.

Furthermore, it is important that many multinational industrial equipment manufacturers develop specific capabilities in order to sell to middle-market consumers in China. They must conduct research and development in China (or other similar markets), while integrating new and old businesses, and properly handling intellectual property issues. They do not have the home-field advantage that mid-market innovative companies have: familiarity with specific market segments, access to low-cost production resources, and in-depth understanding of the regulatory and operating environment. The joint venture established by the German MAN Group, for example, can also gain some of these advantages, but it also increases complexity and incoherence.

All in all, in emerging markets such as China, established multinationals cannot easily solve the competition problems posed by mid-market innovative companies. Faced with this crisis, mature multinational corporations have to reshape their overall business models while maintaining their own identity.