Uncommon Sense: China – Rise of the Local Giants

Uncommon Sense: China – Rise of the Local Giants

As China began its meteoric rise, multinational companies from Europe and America established beachheads in the country, and did very well bringing Western products to the East.

It is common knowledge that the Chinese market has become more complicated for Western players. A new class of company has grown up, which has come to be known as a “local giant.” Perhaps the most startling example is the most recent one: Alibaba, the Chinese e-commerce giant, recently completed the largest IPO of all time, raising $25 billion in one day. Other examples of the emerging giant phenomenon in China include Baidu, Henan Shuanghui Investment and Development, Tencent Holdings, Huawei and Haier.

These companies are transforming world business: already, more than 90 of the Fortune Global 500 are Chinese. They are also, of course, making life a little harder for American companies operating in China. What has made this transformation possible, and how ought American and European giants to respond?

We see nine qualities advancing the fortunes of the local giants. If one were to summarize them all, one would say that the local giants have successfully leveraged their original strengths while making up for their original weaknesses.

There is of course no reason that Western companies can’t provide many of the things Chinese consumers want, and in many areas they continue to thrive. But a fundamental feature of successful local giants is that they are fast. So, as the Chinese consumer changes, they respond more quickly, developing products to meet the emerging need as fast as they can. The local giants are fast on innovation, and fast on distribution. For instance, the most successful local player in the China laundry detergent market recently achieved 40% of weighted distribution among modern trade outlets across the nation in the very first month of its new product launch. Today, some six months later, its total brand coverage is 90%—meaning it achieved almost half of its current, near-total distribution capacity in one month’s time.

Local giants also apply the doctrine of speed to marketing campaigns. Today, China is a leading country for social networking—63% of smartphone users between 16 and 64 in China use social networking (the figure for U.S. is 65%). Chinese Millennials in particular love to browse, chat, and make friends online. In this environment, some local giants do much better than multinationals. They will leverage a social event for virtual marketing purposes on a 24-hour turnaround, generating a great deal of discussion, eyeballs and even business leads.

By contrast, many Western companies are still emancipating themselves from the model they thrived on for so long: one-size-fits-all, built on economies of scale—but often involving the need to wait for approval from HQ on the local marketing campaign. Not surprisingly, this led to their responding more slowly to changing local tastes. For instance, the majority of multinational manufacturers regards three months as the appropriate benchmark for achieving 50% of total distribution capacity—compared with the one-month-plus example above.

Other factors we have noted besides speed that we believe underpin the success of local giants are a considerable appetite for risk and an intense focus on the project in hand. Speed and risk appetite are connected, because speed allows you to deploy a trial and error approach—to try something and stay with it if you succeed, or to fail quickly and move on. Focus speaks for itself.

With China’s rise also came greater self-confidence among Chinese consumers with regard to all things Chinese. “Made in China for China!” became a powerful idea that significantly helped the growth of the local giants. Some of the success stories in the CPG world, our own particular focus, can be related back to the particularities of Chinese culture—herbal concepts, Chinese medicine, Chinese traditional handcraft—indeed, any product whose successful production and marketing requires a deep understanding of Chinese culture and history, as well as its diversity. Younger, more educated consumers want high quality, but they are more open to Chinese products, compared to their parents’ generation, who value imported products and Western lifestyles much more highly.

“Made in China for China” means that MNCs (multi-national companies) in the CPG world could still struggle even if they moved faster, focused more precisely, adapted to local tastes, and took on more risks. Today’s Chinese consumer is far more complicated than the one MNCs came to serve decades ago.

For instance, we have found that you have to get the flavor of a drink just right, and that the winning flavors differ by region. Today, the MNCs still dominate in carbonated soft drinks (CSD). But tea and plant protein beverages are the major growing categories, in part driven by growing Chinese consumers’ concerns about health. This plays to the local giants’ strengths, because there is a long, long history of thinking about health in China differently from the concerns of Western medicine. How does one achieve healthy “balance”? What will help the flow of blood? These are things that adjusting fat percentages and sugar content will not obviously address.

The challenge has to do not only with the way MNCs think, but also the ways Chinese consumers think about MNCs. For instance, in the juice market in China, the top selling SKU overall is heavily-sugared pear juice. There does not appear to be anything special about pear juice—one would imagine any manufacturer could successfully produce it. But the fact is the MNCs are not strong players here. Pear juice manufacturers add traditional sugar to pear juice, because Chinese consumers believe traditional Chinese sugar makes a difference. Similarly, a local pharmaceutical supplier successfully entered the CPG market in early 2014 with a “Stomach Protecting Functional Biscuit” containing monkey-head mushroom—traditionally valued by Chinese people as having stomach protecting properties. Chinese consumers don’t see foreign MNCs as credible in this area.

Local giants are advantaged in other ways. They have stronger relationships with the local retailers that dominate over 80% of trade, with whom they have built up decades of trust, as well as with local distributors, which play a major role in ensuring that products end up on Chinese shelves in this vast country. In addition, they can now play either deep or wide because of their strong presence in rural areas and lower city tiers (55% of the Chinese population is rural, and the government’s policy is strongly toward driving lower-tier-city urbanization).

In establishing themselves in all these ways, local giants have been very diligent in making up for their original weaknesses vis-à-vis the multinationals. MNCs used to leverage a global footprint, along with better resource allocation and best-in-class cross-market practice advantages against local giants, which focused only on local markets. Nowadays, China local giants are establishing their own international footprints, acquiring first-class raw materials from all over the world, and even beginning to attract talent from the large MNCs for leadership roles. They have also improved knowledge flows across their organizations, helping them make up gaps in their operating models, advance new marketing models, and improving their investments both above and below the line.

At the same time, local giants are investing more and more in different channels. For example, the biggest local players are sponsoring China’s recent hugely-popular entertainment shows, “I Am A Singer,” “The Voice Of China,” and “Dad, Where Are We Going?” to the tune of US$40 million to $85 million, enhancing and spreading their brand image more widely.

Last but not the least, the local giants are no longer simply producing copycat products—they are innovating against unmet customer needs directly. In the 80s and 90s, Chinese businesses borrowed growth and production models from abroad. Big Western brands were famous; local brands were cheaper and appeared lower-end. Today, any needs-based segmentation of Chinese consumers would generate many more segments. For instance, the most successful local skin care brand manages to provide products priced all the way from $1 to $25, satisfying users from the most rural to the most affluent urban dwellers. Local players have done a good job of capturing niche markets with emerging needs, too—with products such as silicon free shampoo and additive-free dairy products.

Local giants pose many challenges more MNCs. How can the MNCs leverage their historical advantages and global scale to meet it?  Stay tuned…