Multinational
high-tech companies in China
are losing out to their
local counterparts. Here¡¦s
how they can regain market
share.
¡@
"If
you can't beat them, acquire
them." This has
become the mantra favored of
late by multinational
high-tech companies in China
as they face fierce
competition from Chinese
players. Our research into
1,000 Chinese high-tech
companies shows them to be
growing three times as fast
as the multinationals, on
average. So what are foreign
companies doing wrong?
By sticking too rigidly
to product specifications
for developed markets and to
high prices, multinationals
in many sectors have
squeezed themselves into the
thin, high-end market in
China. To succeed in the
Chinese high-tech market,
these companies would do
better to focus on the
faster-growing midrange
segment, where products cost
an average of 20 to 30
percent less than their
high-end counterparts.
Take electrical
equipment, a $60 billion
industry comprising sectors
such as automation and power
generation. While
multinationals focused
almost exclusively on the
high end of the market,
midrange Chinese players¡Xled
by emerging contenders such
as Chint, a maker of
low-voltage electronics, and
Shanghai Electric, a maker
of power generation
products¡Xhave expanded their
share of the overall market
to 65 percent, from 55
percent, over the past five
years. This segment is
growing almost twice as fast
as the market for electrical
equipment overall.
Multinationals as a group
saw their share of the
market drop to 35 percent,
from 45 percent, since 2001.
Local companies such as
auto electronics maker
Hangsheng Electronics or
medical-equipment maker
Shinva may not yet be
household names, but such
enterprises are gaining
dominance in their
industries. By 2010, we
estimate Chinese companies
will hold as much as 80
percent (about $260 billion)
of China's high-tech market,
up from 67 percent in 2004.
Some multinationals have
responded to the erosion of
their market share by
acquiring the new breed of
midrange Chinese winners in
order to quickly build up a
competitive midrange product
line for the Chinese market.
The multinational out
shopping faces a number of
obstacles in its path.
First, there's the question
of what they should be
looking for. Simply spotting
a suitable company is a
challenge in a market
characterized by a lack of
transparency. Local players
with revenues of $30 million
to $100 million and 500 to
1,500 employees are
potentially attractive buys.
Midrange Chinese companies
usually do not compete in
the same high-end segment as
the multinational acquirer
and have more narrowly
focused products, making it
easier for a multinational
to plug gaps in its product
portfolio without buying a
company with an overlapping
product line.
But when a multinational
tries to buy a local
company, it may find that
Chinese competitors¡Xwhich
have been fiercely battling
each other for
survival¡Xclose ranks against
a perceived foreign threat.
The local companies may
enlist the support of
government officials to
require foreign players to
find a local partner before
bidding for a project or to
require a certain amount of
locally made components.
Thus gaining government
backing for a deal is a
vital prerequisite.
Chinese companies can
also squeeze foreign
competitors out by pushing
down prices. Chinese
companies are used to
operating on very thin
margins: last year the top
1,000 electronics companies
in China had an average net
margin of only 2.5 percent.
Nonetheless, some foreign
companies are overcoming
these hurdles. For example,
one multinational maker of
industrial electronics last
year bought a Chinese
company with a 30 percent
share of the midrange
segment and 25 percent
annual growth. To ensure
that customers and employees
didn't flee following the
merger, the acquirer enticed
key management to stay put
by allowing the Chinese
company to maintain
day-to-day management
control. While it's too
early to judge the outcome
of the deal, initial signs
look positive: in the first
quarter of this year, sales
increased by more than 60
percent.
Other multinationals can
be expected to follow this
trend. China is becoming an
increasingly competitive
market, and the route to
success for foreign
companies will lie in
eschewing their past
preference for the high end
in favor of carving out
stronger positions in the
midrange segment
