Three Questions to Pressure Test Your Global Strategy Against Radical Changes In Global Demand

Three Questions to Pressure Test Your Global Strategy Against Radical Changes In Global DemandA radical and rapid transformation of global demand is underway. Traditional assumptions about market leadership and global competitiveness are under threat as Chinese consumption begins to dominate a growing number of product sectors and industries. The speed of change is phenomenal – with China moving from relative insignificance to become the top market within a two to three year planning cycle. Firms risk being lulled into complacency by the US/European “recovery” and the much-heralded slowdown in Emerging Markets.  

Take 10 minutes to pressure test your current global strategy.

The Financial Times recently summarized (and neatly graphed) the World Bank’s latest GDP estimates based on purchasing power parity:  “China poised to pass US as World’s Leading Economic Power This Year.”

Some economists expressed surprise that this should happen in 2014 instead of the end of the decade as many anticipated.  Others down played the macroeconomic significance (at current exchange rates, China is only half the size of the US).  Still others were quick to ridicule the idea that GDP in any form was an indictor of “real” power.  And the perennial “Coming Collapse of China” crowd chimed in with their familiar refrain.

Take 10 minutes to pressure test your current global strategy.

This increasingly well-documented macroeconomic case gets treated much like the headlines describing the growing body of scientific data on climate change:  While clearly true, little change occurs in the perceptions of Western decision makers. Urgent, perhaps radical, solutions are shunned in favor of “safer” incremental bets.  The growing frequency of the headlines cataloging China’s continued growth may even add to the level of complacency that permeates thinking at many Western firms.

How to Pressure Test Current Mindset and Strategy

Yet dramatic change is already well underway.  China has embarked upon its “next stage” of industrial development; one that will redefine its role in global manufacturing and reshape the global economy.  Central to this change underway is the role of China’s domestic market – and the Chinese consumers and industrial customers who will determine a firm’s global success or failure.

Simply for the sake of “pressure testing” current plans, strategies and policies, explore the possible impact of three alternative assumptions about the near term future.  How would your firm’s thinking on market size, growth, costs, customer needs, competition and innovation change if your management team accepted these assumptions?  What confidence would you – and your investors – have in your current strategy if the following were the central realities – or the new “conventional wisdom” – for your industry?

1.    China has already overtaken the US and EU in market size and growth; the speed at which this “scale and growth gap” is widening will become the critical determinant of future global leadership in our industry

Instead of being lulled into complacency by the debate on whether China’s economy a) can, b) will soon or c) might catch up with US GDP, consider the scale of the China market.  Ignore obvious products – such as basic food items – where you would expect a nation of 1.3 billion people to easily surpass American or European consumers.  Focus on “modern”, “sophisticated” and “expensive” products:

•    China’s 2014 replacement market for smartphones (yes, smartphones, not generic cell phones) is larger than the entire US smartphone market. Total Chinese smartphone purchases will be three to four times larger.  This year.  And Chinese customers will mainly pay cash up front of $150-600 per phone instead of signing on for “subsidized” two year monthly contracts favored by American consumers.

•    Capital goods have long been an area where Chinese customers dominate global demand.  This has generally been measured in multiples of the US or Europe in such “traditional” areas as textile machinery, ceramic kilns, construction equipment or shipping cranes.  Not surprisingly, Chinese manufacturers have emerged as global players in these areas.  But what about gene sequencing?  Sophisticated chip-making machinery?  Medical equipment?   These represent just a handful of the areas where China has already become the world’s largest market, where demand continues to grow at rates three to four times those of the US or Europe and where local firms and/or other Asian upstarts are already staking their futures.

2.    Chinese demand will soon dominate virtually all market segments, creating a global leadership platform for companies that choose to lead in China

It took only four years for China’s purchases of automotive vehicles to double from 8 million units in 2007 to more than 17 million units in 2011 (surpassing the US in 2009).  But total market size – even in this relatively sophisticated category of expensive durable goods – has prompted some to assume that “low end” demand predominates; that China is not prepared for their high-end value proposition.  Look again:

•    China is indeed the largest market for cheap cars. But it is also the world’s largest market for BMW and Bentley.  Porsche’s Chairman expects China to overtake the US in 2016.  Rolls Royce recently announced that the US had passed China by a handful of units to regain the top place among its global markets.  As one wag quipped: “It sounds like well heeled Chinese want Rollers in their US garages too!”

•    A paltry 6,795 electric vehicles (EVs) were sold in China in 2013, compared to 96,000 in the US.  In the first four months of 2014 BYD sold 3,300 units with another 8,000 already on order.  Its new plug in hybrid reportedly sold more than 6,000 units.  BYD’s SUV will launch in the second half of the year and its recently signed JV with Daimler presages additional models in the near future.  Nissan, GM and others are also launching EVs. Tesla is designing a longer “S” model specifically for the Chinese market. With municipalities introducing aggressive purchase incentives and subsidized charging infrastructure being required in leading cities, the Chinese EV market could move from “negligible” to become the world’s largest over the course of a single year.  And – as with smart phones – China seems likely to out-distance the US by a factor of three or four times within three to five years.

3.    Competitors can – and will – offer a better value proposition, not just a “cheaper” alternative, designed for Chinese customers

The assumption that “our superior   (fill in blank: brand, cost, quality, technology…) will allow us to win in the long run” carries high risk. It is increasingly apparent that the risk of miscalculating China’s pivotal role as a platform for global competitiveness will prove infinitely greater than the perceived operational risk of building a globally-oriented business platform in China.

•    In the smartphone market, Samsung, Lenovo and Xiaomi, Huawei, Coolpad and ZTE have tailored products to meet the needs of Chinese customers. Apple, generally considered the world’s most powerful brand, struggles to maintain 4th position (in unit share), with a product and an approach that seems only to work in the relatively small US market.

•    In oncology, Zhejiang Betapharma has launched a patented innovative EGFR drug for lung cancer.  It sells at 65% of the price charged for competing products from Novartis and Roche.  The Chinese firm developed the product in half the time and less than 10% of the development cost of the Western firms by focusing only on China – the world’s largest population of lung cancer patients.

•    In medical devices, Chinese market leaders Microport and LePu make drug-eluting stents at one-fifth the cost of firms like Abbott and Boston Scientific, capturing the majority of the world’s largest stent market with products that many Western experts and Chinese physicians consider to be equal in quality to the imported Western devices.

As Chinese customers come to dominate global growth, leadership by Chinese or Asian competitors is not a foregone conclusion.  China’s growth platform and accompanying competitive advantages can be leveraged by Western firms too:

•    In the traditional car market, aggressive long-term commitments – to manufacturing, product development and engineering – by Western firms like GM and VW – are driving sustained share gains against local car makers.

•    P&G has consistently built leading market share positions across the majority of its product categories.  Rejoice (hair care), Olay (skin care), Tide (powdered detergent), Pampers (baby care), Safeguard (personal cleansing), Gillette (male grooming).  Colgate has done the same it dental care.
•    As much as 2/3rds of all branded luxury goods are purchased by Chinese – either within China or while travelling abroad.  Traditional brands from Europe and the US have moved swiftly to tailor designs, retail infrastructure, market segmentation, advertising, and distribution channels in response.

Claiming that “our industry is unique” and sorting the available facts to justify an existing view of the global market seems a much larger threat than launching an independent effort – perhaps one divorced from the traditional planning process – to explore fundamental changes in demand with a truly open mind.  Without a concerted focus on meeting the needs of customers in the world’s largest market, today’s “global leaders” are likely to cede their positions to more astute and committed competitors.

About George Baeder

George Baeder has spent 35 years helping corporate leaders and policy makers to unravel the complexities of Asian business and economics. China’s growing global role will continue to radically alter long-held assumptions about market priorities, innovation and rules of competition. After nearly four decades in Asia – as an economist, strategy consultant, entrepreneur, investment banker and line manager – George is dedicated to helping organizations challenge and rethink their assumptions, pinpoint the risks and opportunities inherent in China’s emerging global leadership and develop actionable strategies and initiatives to create tangible high-impact outcomes.

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