Will Chinese manufacturing companies take over
the world? To go by the sometimes breathless reporting in the international
financial press, it seems that this is all but inevitable. China's low
labour costs and big pool of engineering talent have led many to assume that
we are just a few years away from the emergence of Chinese Sonys and
Samsungs: world-class brand-name consumer appliance companies.
It will not happen any time soon. To be seriously internationally
competitive, a company must have at least one of the following: its own
intellectual property (whether a bit of technology or a distinctive
manufacturing or business process); a strong brand name; or world-class
efficiency. No Chinese firm now has even one of these; and it will be a
decade before any does.
There are three reasons for this:
Reason one is that Chinese companies do not do enough research and
development. The lack of R&D is not for lack of desire: it reflects a
structural problem in the Chinese economy. China's comparative advantage in
low manufacturing costs is so overwhelming that it removes any incentive to
invest in innovation. Why spend two years developing a distinctive new
product when your next-door neighbour, who makes no such investment, can put
you out of business during that time by undercutting you on price? This
leads to reason two, which is that the things that make Chinese firms
successful in China do not help them - and may in fact hinder them - in
finding success abroad.
What Chinese companies do well is sales. The success of a consumer
products firm such as TCL, which has a strong position in both the
television and mobile phone handset markets, comes not from technology (all
borrowed) or from brand (TCL is a well-known name, but the name creates no
associations in the consumer's mind, which is what a brand does). It comes
from a well-oiled sales machine.
Selling well in China mainly means mastering the country's arcane and
unique distribution networks, exploiting relationships with local government
officials and finding the right - generally low - prices. It has very little
to do with evolving a brand, doing creative industrial design or even
employing world-class methods of supply chain management. In other words,
being able to sell in China does not equip Chinese companies to be able to
sell anywhere else in the world.
Reason three is that for Chinese companies, domestic opportunities will
always be more attractive, short-term, than foreign ones. TCL, for example,
has big ambitions to become a brand-name TV exporter. Yet, despite price
wars and cutthroat competition, its margins are still higher on domestic
sales than on foreign.
Why? Because at home TCL can sell at the high end of the market, whereas
in exports it can only compete at the low end. If China's market were small,
this would create a strong incentive for TCL to figure out how to move up
the export value chain. But because China's market is huge, and will be for
years, companies like TCL will always have an incentive to chase fat profits
at home rather than laboriously carve out new niches abroad.
Research by the China Economic Quarterly
