Shanghai, China, March 19, 2014 --(PR.com
)-- "The Chinese manufacturers, in one hand," according to Allen Lee, the Junior Partner of Solidiance, "are no longer satisfied with the low margin and low brand awareness in the global market - they now invest in tremendous amount of money into the R&D (research and development) into the brand building efforts in order to compete equally with the MNCs. And they also innovate downwards to the distribution channel."
As operational costs in this still highly lucrative market are quickly increasing, multinational companies (MNCs) are finding ways to be agile in adapting their production processes to remain cost competitive in the Chinese market.
What are the changes?
1. Business model upgrade: focus on innovation for higher-end consumers
Emerging Chinese enterprises can now potentially disrupt the prowess of the MNCs in the local market through their ability in proposing alternative enforceable solutions and business models that specifically respond to the local customers' needs. Given the customer proximity they possess, Chinese companies are also well positioned to start off their new product concepts through a simpler version of the existing technologies before they innovate, gradually challenge and finally position themselves to unseat the MNC's dominance.
2. One-stop Solutions: business expansion through vertical integration
The experience of serving the MNCs has granted the Chinese enterprises enough capital and knowledge to perform business expansion through backward and forward integration. By expanding their service offering, including installation, design, maintenance, and operation, this one-stop business model produces a new stream of revenue by providing a comprehensive and better customer experience.
Drivers behind the sector upgrade
The Chinese manufacturing sector upgrade is enabled by five major external changes:
1. Labor market reform
An increase of minimum wage in China has created a need to reassess profit margin capture of the traditional business model which traditionally relied on low labor cost. It has forced manufacturers to either move the production to inland areas where the minimum wage is lower, for the time being, and/or upgrade to more automated facilities.
2. Direction change in government policies
The central government has shifted their strategy from encouraging knowledge and skills obtainment to promoting domestic consumption through locally-produced higher value products. They are now heavily focusing on the innovation through investment of the R&D via technology acquisition. Generous incentives have also been provided along with the removal of various restrictions to stimulate this process - as a result, outbound investment finally took over the foreign direct investment (FDI) with patent filing dominating the national agenda.
3. Consumer maturation
Spurred by the economic development over the last decade, Chinese people's personal wealth has grown , resulting in the increasing number of middle class and consumer demands in terms of value and quality. Chinese consumers now dominate the global luxury goods market despite its high tariffs, leaving not much of an option for the local brands except to move up the value chain to enter the luxury market.
4. Abundant supply capacity
The excessive investment given by the government created an overcapacity of supply, urging them to shift from quantity-oriented to quality-oriented manufacturing. The overloaded inventories require selling at the lower prices, and this of course lowers profit margins and creates negative competition through quantity-oriented business strategies. A reversed technique is therefore required -- the quality-oriented approach, which is feasible through inventory management improvement, product differentiation, consolidation to ease down the competition, and expansion into new markets.
5. Increasing competitiveness of local manufacturing
The current China's manufacturing evolution is expected to gain competitiveness of the local manufacturers in both domestic and international markets. The rapid growth of emerging markets has significantly affected the market competitiveness, particularly those in Asia. As the era of cheap manufacturing is nearing to an end, local manufacturers are adapting through different ways including indigenous innovation, advanced technology acquisition from abroad, etc.
Impacts to the MNCs
The MNCs will gradually be facing downstream and upstream threats coming from local brands which aim to take up the chunk of the market shares and expand their business towards foreign markets. MNCs will also be competing with local players which are equipped with the following advantages that need to be leveled in order to remain competitive:
1. Mature corporate management
2. Governmental support and protection
3. Customer proximity
4. Being a follower
5. Scale and capital
6. Ecosystem and infrastructure support
More detailed insight and overview of the Chinese manufacturing upgrade and how both local and foreign players are adapting their business strategies to survive in this lucrative market are available in the complete version of "Chinese Manufacturing2.0 : Threats ahead" white paper, which is free to download on http://www.solidiance.com/whitepaper/chinese-manufacturing-threats-ahead.pdf.